Budget 2012/2013 - Comment

Minister Gordhan’s 2012 Budget is very much set against the backdrop of the struggling global economy. In his speech on Wednesday the Minister took the opportunity to remark that, despite recent developments, Greece’s problems (and, by implication, the problems of South Africa’s biggest trading partner, the European Union) are far from over.

The global slowdown and continuing uncertainty in international markets doubtless account for the sharp reduction in South Africa’s projected GDP growth rate to only 2.7 percent for 2012/13. In light of this slowdown, we must commend the Minister for maintaining the national budget deficit within reasonable levels, at 4.6 percent of GDP – this despite the fact that total expenditure for this year is set to break the R1 trillion mark for the first time ever.

The intention to further reduce the budget deficit to only 3 percent of GDP by 2014/15 is also admirable. But over the intervening years Minister Gordhan will steadily reduce public sector borrowing and has no plan to significantly increase tax revenue – so achieving this deficit reduction is contingent on two things: conservative (with a small ‘c’) government expenditure and strongly rebounding GDP growth of 3.6 percent in 2013/14 and 4.2 percent in 2014/15, amounting to the South African economy growing by nearly 11 percent over the next three years.

There are two major reasons why these projections are a little optimistic. The first is the instability in the global economic environment. Our GDP growth is unlikely to rebound strongly unless a similar rebound happens in our trading partners in the West, which at this stage is far from certain.

The second reason is a domestic concern. South Africa’s ‘social wage’ bill already accounts for almost one in every ten Rand of Government spending, and is set to grow to exceed that proportion by 2014/15 – a rate of increase well above inflation. This is an unsustainable burden on the national fiscus. If it is not reigned in, it will continue to drive up government spending, increase national debt and hamper economic growth. In his speech, Minister Gordhan characterised SA’s dauntingly high spend on social grants as “an investment in people,” but the reality is that this money is not being ‘invested’. It is being spent on maintaining an untenable status quo of mere subsistence for South Africa’s poorest, and will not yield returns in the future.

The investment in people South Africa really needs is job creation, to enable those who currently depend on social wages to escape from poverty and begin to contribute to the fiscus. The further extension of the Expanded Public Works Programme, while a commendable initiative, is not a long-term solution. Government’s role in the labour market should be neither as the employer of choice, nor of last resort, but rather to create a sustainable enabling environment for the private sector, and particularly for SMEs as the primary drivers of job creation. This requires effective education, expansive and functional economic infrastructure, and a business environment conducive to growth.

Minister Gordhan’s announcement of tax breaks for small businesses is a step in the right direction in this regard, as is the stated intention to increase investment in South Africa’s economic infrastructure. But the numbers for medium-term estimates of expenditure do not reflect the verbal commitment to infrastructure investment by both Minister Gordhan and President Zuma. In fact, between last year and 2014/15, spending on both education and infrastructure will only slightly outpace inflation, while the cost of social grants continues to soar, as one of the fastest growing items in the budget.

Why this delay in committing the funds needed for infrastructure investment? Minister Gordhan has earned a reputation for fiscal prudence through his ability to narrow deficits, grow revenue, and keep spending under control. Delaying massive infrastructure expenditure for the medium-term in the hope that the global economy will turn around in the meantime may indeed prove to be the prudent course of action. A global upturn would reduce South Africa’s borrowing costs and thus ultimately make the proposed projects cheaper for the taxpayer. But if that upturn does not happen, what now appears to be fiscal prudence in an uncertain world may instead start to look like a costly hesitation to make the hard investment decisions South Africa so badly needs.

For a generation of young people dependent on the state, three more years is a long wait.

23 February 2012