Gordhan ‘has little room to manoeuvre’
Finance Minister Pravin Gordhan has a slim margin to manoeuvre tomorrow when he delivers the annual budget amid slow growth and falling revenue.
Nevertheless, he needs to reassure international ratings agencies South Africa is on a sound fiscal path.
Nedbank senior economist Nicky Weimar said Gordhan’s challenge was keeping the deficit – and negative investment sentiment – in check.
“We have had very modest growth, which is going to deliver very modest growth in tax revenue, and yet we are running on a deficit which we desperately need to contain given that you have already been downgraded by three international rating agencies.”
Weimar said providing policy certainty would be “the cheapest way” for the government to stimulate investment and growth.
Yet, this had not been forthcoming in the state-of-the-nation address, and was hardly in Gordhan’s hands.
Last year, in the aftermath of the Marikana shooting and ahead of the ANC’s leadership election in Mangaung, Standard & Poor’s warned that it would downgrade South Africa to an investment rating of BBB- if diverging factions in the ruling party were to impede the formation of a policy framework conducive to growth, or if the ANC strayed from the path of fiscal consolidation.
Investec chief economist Annabel Bishop said policy uncertainty and labour constraints were key contributors to negative investor sentiment, which had prompted the sale of R5.5 billion worth of South African equities since mid-August.
Bishop forecast that the budget would maintain the deficit ratio projections as the medium term budget policy statement Gordhan delivered in October.
“We do not expect any widening. The 2012/13 fiscal deficit will likely come out at 4.7% of GDP, if not below.”
Likewise, she did not foresee further fiscal slippage, but said should it occur, South Africa’s ratings could slip more and send the cost of borrowing higher still.
Bishop cautioned the government to be more conservative on current spending, and to contain the state’s wage bill.
In October, Gordhan vowed to seek to curtail both wage hikes and “unwarranted growth in personnel numbers” in the public sector.
Democratic Alliance finance spokesman Tim Harris said billions could be saved by doing so drastically, and confidence could be restored by using this money to start implementing the National Development Plan (NDP).
He advocated combining some ministeries and scrapping several, including economic development, public works and sport, and all district municipalities.
In his party’s annual alternative budget, Harris said restricting annual wage increases to inflation levels would realise R774 million in savings, and doing away with district municipalities, about R529m.
“There is a lot of inefficiency and fat in government and we are proposing to cut it,” Harris said in Johannesburg on Monday.
“We think the number one thing that Pravin Gordhan can do on Wednesday to restore confidence in government is to start implementing practical items from the National Development Plan.”
Harris said the tenets of the NDP to implement first included opening the economy to competition, agressively stimulating regional trade and upgrading infrastructure.
The DA thinks 10% of GDP should be spent on infrastructure improvements, but that the fiscus alone could not fund the level of implementation needed to bolster the economy.
Its proposals included letting parastatals sell off assets to fund infrastructure projects and bringing in the private sector to build and manage infrastructure assets.
Bishop said the NDP’s triple aims of reducing poverty, unemployment and inequality were likely to be focal points of Gordhan’s budget.
She said spending on social welfare and education were, therefore, likely to remain top priorities, but attention needed to be paid to how the state could improve the enabling environment to do business in South Africa as this was “sorely lacking” in Zuma’s speech.
Economists said Zuma’s announcement that Gordhan would undertake a review of the tax regime, notably on mining royalties, was unlikely to impact on this budget.
However, they suggested income tax could rise as soon as 2014 and the top earners who already pay about a quarter of the country’s income tax would bear the brunt of hikes.
Old Mutual economist Hugh Hacking said: “Gordhan is likely to focus on efforts to increase the South African tax base in the next 12 to 24 months, which will have a significant effect on both companies and individuals alike.”
Bishop said it would reduce economic growth by crowding out private sector investment, and Harris agreed it would be counter-productive.
“Rather than raising taxes, we believe that the focus should be on increasing the tax base and introducing tax incentives to incentivise job-creating investment,” he said.