THE principal driver of the budget was not, as some had predicted, the forthcoming election.
Finance Minister Pravin Gordhan avoided popular increases in spending or cuts in taxes. Instead, the budget was shaped by the weakness of South Africa’s economy and by continued concerns about South Africa’s ability to attract much-needed foreign capital inflows.
Thus, the budget deficit for 2013-14 turned out to be 4% of gross domestic product (GDP), compared with the 4.6% predicted a year ago. It is expected to remain at 4% in the coming year. The lower deficit last year was achieved even though the economy was weaker than expected — growth last year was only 1.9%, compared with the 2.7% forecast.
Higher than expected revenue helped reduce the deficit, but government spending was also lower than budgeted.
The government tightened its spending controls out of concern the international credit agencies would downgrade South Africa’s credit standing, making it harder to attract needed foreign capital inflows.
In depth: Budget 2014
The need for such inflows is reflected in our continued high deficit on the current account of the balance of payments. Despite the weaker rand exchange rate and Gordhan’s belief that this will benefit South Africa’s exports, the Treasury expects the current account deficit to average 5.8% of GDP over the medium term. Few countries are as dependent on continuous inflows of foreign capital.
We will continue to need these foreign capital inflows at a time when changes in the world economy, especially tighter monetary policies in the US, may make it increasingly hard to attract such inflows. The budget therefore seeks to assure the foreign savers, whose money we need, that our fiscal balances are being handled responsibly and that government debt will peak at about 45% of GDP in 2016-17 — a level that is still quite modest compared with other countries.
The second driver of the budget is our continued anaemic economic growth performance. The budget speech tries to blame this weakness mainly on factors beyond our control — such as the 2008 global financial crisis, continued weak and uncertain growth in much of the developed world and, more recently, weakening commodity prices.
Yet these global factors apply equally to the rest of Africa, where, the budget acknowledges, economic growth is booming. An important part of our economic weakness is clearly self-inflicted.
Turmoil in the mining industry and the unavailability of critical infrastructure, especially for electricity, are important causes of our continued poor growth. In the past week alone, Eskom has forced major industries to curb production because it could not meet our electricity needs.
At various times it pays big manufacturers not to produce. This reduces our growth, reduces business profitability and reduces the taxes the Treasury would otherwise be collecting if all businesses were operating at full capacity.
The budget speech warns that South Africa must grow 5% or more a year to make faster progress in creating jobs and reducing poverty. This is possible only if investment rises.
The government places great store in its infrastructure investment to achieve this objective, but the promised R847bn infrastructure spending over the next three years is only 5% up on what was promised last year.
On an annual basis, spending is now less than was expected a year ago. The reason for this is that continuous delays in infrastructure construction mean spending takes much longer than expected to happen. Growth will accelerate only if private sector investment recovers. Gordhan acknowledges this, saying "the next phase of growth is about the dynamism and agility of (the) private sector and the synergies created with government".
Domestic economic weakness means the budget is another holding operation. Gordhan notes: "We have saved this country from the worst." This needs to change. The budget warns: "We cannot just muddle through the next decade."
The budget also urges that "it is time for a bold vision of our future". That vision cannot be delivered by the changes in annual government spending and revenue reflected in a budget. It requires much greater political will than is evident at present. And it requires the buy-in of constituencies other than just the government. Achieving this vision is South Africa’s greatest economic challenge.
By Gavin Keeton
Source: Business Day
Keeton is with the economics department at Rhodes University.