Finance Minister Pravin Gordhan tried hard in the medium-term budget policy statement to reassure sceptics that South Africa will achieve its goal of fiscal-deficit reduction. The deficit will fall, he projects, from 4.8% of gross domestic product (GDP) this year to 3.1% in 2015-16. Government debt will peak at just less than 40% of GDP, up from 23% in 2008-09.
To achieve these goals, the government must keep a tight rein on spending. This year, overall spending will be unchanged from the February budget. Expenditure growth in real terms is limited to 2.9% a year over the next three years. "New activities have to be funded," Gordhan warned, "through savings, reprioritisation and reducing waste."
The statement emphasises, too, the government’s determination to shift the make-up of such spending "in favour of the creation of social and economic assets". To achieve this, the wage bill will grow just 1.3% a year in real terms, while investment spending will grow 4.3% a year. To meet this goal, the "government will take a more deliberate approach to managing overall employment and wage trends across the public sector". The message to the public sector trade unions is that higher than budgeted wage settlements will be offset by shrinking employee numbers.
The government wants to achieve two things through this planned path of fiscal prudence. First, it hopes to persuade the credit-rating agencies that their concerns about South Africa’s ability to meet future debt repayments are unfounded. Foreign bond purchases mean lower interest rates, which reduce the cost of funding the government’s debt. Without foreign capital inflows, we will struggle to fund the deficit on the current account of the balance of payments.
The government’s second goal is increasing infrastructure spending — the last 30 years of neglect are a severe constraint on economic growth. The World Bank’s 2008 Growth Report confirms how critical such spending is: "No country has sustained rapid growth without also keeping up impressive rates of public investment — in infrastructure, education and health. Far from crowding out private investment, this spending crowds it in. It paves the way for new industries to emerge and raises the return to any private venture that benefits from healthy, educated workers, passable roads and reliable electricity."
This "crowding in" effect requires, however, that the infrastructure is provided at a competitive price. It is unclear that South Africa’s planned infrastructure spending meets this requirement. The statement notes that the bulk of infrastructure spending "will be financed from the balance sheets of state-owned enterprises, either from retained earnings or through the issue of debt." Unfortunately, the present focus is too heavily weighted to retained earnings.
Writing on these pages, economist Brian Kantor has shown that monopoly state enterprises are creating inflated returns on their investments by pushing up prices. Under the guise of "user charges", current revenue is used not only to cover costs, but to raise the actual capital needed to fund huge investments. This is a costly way to fund infrastructure development, reducing competitiveness instead of improving it.
An analysis of the announced R4-trillion worth of projects reveals many projects of doubtful financial viability and whose ability to "crowd in" other investment is questionable. This includes a number of gigantic projects — nuclear power stations (R300bn), a high-speed rail link between Johannesburg and Durban (R300bn), hydroelectricity in the Democratic Republic of Congo (R200bn), a solar park in the Northern Cape (R200bn) and a petrol refinery at Coega (R200bn).
To put the scale of this in context, any one of these is equivalent to the market capitalisation of Sasol (R230bn) or Standard Bank (R170bn). The combined cost of Eskom’s Medupi and Kusile power stations is R220bn. Eskom struggled to fund these projects and also faced delays and cost overruns. Raising the capital for the long list of colossal projects through levies on users will dramatically raise the cost of doing business.
Fiscal policy in South Africa faces real obstacles. Meeting government targets will not be easy. Higher than budgeted wage settlements will put deficit targets at risk and hamper attempts to restructure government spending in favour of investment. Shifting the burden of raising the capital required to fund these projects onto their users threatens to undermine the benefits that infrastructure investment are supposed to bring.
The government has nailed its colours to the mast. There is little room for slippage.
• Professor Gavin Keeton is with the economics department at Rhodes University.