As far as challenging jobs go, the office of the South African Finance Minister must rank up there with the toughest. To budget in one of the most unequal societies, where a delicate balance has to be struck between the priorities of redress for an unjust past, the day-to-day affairs of governing, and expenditure on infrastructure to secure a more prosperous future, demands steely nerves at the best of times. To do so under the current conditions of low growth (last year it was 2.5%), and by extension dwindling revenues, requires nothing short of a miracle worker.
When Min. Pravin Gordhan makes his budget speech on Wednesday he will have his work cut out. In a tough economic climate those fortunate enough to earn an income will hope for tax relief, while the poor and unemployed will be desperate for some form of reprieve from the material pressures that weigh them down. It is impossible to view these circumstances in isolation from the social polarization that has fragmented our society in recent years. The country can least afford another Marikana, which not only dented confidence in the country as investment destination, but more importantly, deeply scarred the nation’s psyche. Yet, while these social and fiscal pressures are mounting, the space that Gordhan has to work with has been shrinking.
Probably his greatest worry, and something that ratings agencies will definitely be watching, is whether he will be able to contain a budget deficit, which has missed its targets on successive occasions in recent years. Failure to meet another target may signal limited capacity by the Treasury to stick to its three-pronged approach of promoting counter-cyclicality (the ability to cool down the economy when it overheats, and stimulate it when it loses steam), sustainability (maintaining prudent spending- and taxation policies) and inter-generational equity (ensuring investment that enhances-, rather than burdens the well-being of future generations). For the largest part of the previous decade it managed to stick to these, partly because of tight fiscal discipline, but primarily because the economy was growing at robust rates of about 4.2% per annum from 2000 to 2009. Maintaining this balance has been made infinitely more complex by the pedestrian levels of growth that we have experienced since 2009. Increased deficits have necessitated increased borrowing, which in turn translated into a significant increase in the cost to service debts. Over the past three years, this has become the fastest growing expense line on government’s balance sheet, and needless to say, this additional burden crowds out the opportunity for social- and infrastructure spend.
In the absence of any prospect for substantial growth this year, and for that matter in several years to come – there is a growing sentiment internationally that the global economy should brace itself for a protracted period of low growth – government will have no choice but to extract more revenue through taxes. While an increase in VAT may have been worth considering at any other time, its disproportionate impact on the ANC’s working class constituency, combined with rises in fuel and energy prizes, rules it out as an option a year prior to a national election. As such, we can expect this burden to fall on companies and individuals, particularly those in the higher income categories.
At the same time it will also require of government to do some introspection about how it can work more efficiently with the resources at its disposal. It remains to be seen whether government will be able to contain a public sector wage bill, which now makes up close to 40% of all government expenditure. Increases in this sector have been way above inflation and has not been compensated with commensurate increases in productivity levels. At 11.5 of GDP it exceeds wage expenditure of comparative emerging countries, such as Brazil (4.8%) and Russia (3.7%) by far. The thought that increased borrowing is being used to fund consumption – as opposed to investment – of this nature is indeed hard to swallow. While Min. Gordhan has made commitments last year to contain such growth, it may still require some hard bargaining with his alliance partners in Cosatu to convince its member unions to restrain their demands Fraud and corruption at certain levels of government have reached near endemic levels, and a recent Auditor-General (AG) report suggests that a lack of sufficient skills within the state has last year contributed to an astronomic consultants’ bill of R110bn. This is wastage that we certainly cannot afford. There is, therefore, a strong case to be made for boosting oversight agencies, such as the AG and the Public Protector.
But even if the state spends more efficiently, the rich and companies are taxed at higher rates, and more loopholes in the tax net are being plugged, it would still only treat the symptoms of a larger malaise. Last year’s Budget Review noted that, although revenues have increased as a result of higher receipts from persons and individuals, it could not be attributed to increases in employment, but rather to increases in the income of existing workers.
At the heart of our troubles lies an unemployment problem that reinforces and entrenches inherited levels of poverty and inequality. A quarter of the working age population is unemployed. Probably more indicative of the problem is the labour force participation rate (employed- and searching job seekers) of 55%. Although only 6 million South Africans earn taxable incomes, taxes on persons and individuals constitute the largest single contributor to all government revenues. This high dependence on a very small tax base makes us vulnerable.
Now, more than ever, government, together with business and labour, should concentrate their energies and work in unison towards a more inclusive economy, where more people work, are able to take charge of their own destiny, and through their taxes contribute to the creation of a better society with lower levels of poverty and less inequality. The National Development Plan provides such a blueprint that identifies the key levers to be activated in this regard. From now on, we will have to keep all these constituencies (and not only government alone) accountable for its implementation. With 2030 being 17 years away this is no longer a 20-year plan. It needs to be executed with urgency, and the budget will give us a clearer idea of the seriousness with which this task will be tackled.
Given the prospect of low GDP growth in the short- to medium term future, certain aspects of the plan will inevitably have to be prioritized above others. Much has already been said in this regard about the urgency for an improved public education system. It remains of critical importance, but its results may take longer to become visible. More immediate is the need to make the workplace more accessible to young people, who constitute 71% of the country’s unemployed. A youth subsidy has already been mooted, but broad consensus exists that while it may help, such a subsidy would be far from enough to turn the tide. Instead it ought to form part of a broader suite of interventions, which may also include job seekers grants and improved efforts to the link the schooling system with the tertiary system, but also with the workplace.
The temptation may indeed exist for youth labour market policy to become a political playing ball, as was the case with the youth wage subsidy since 2010. The potential benefits that had been foregone would be hard to calculate. It is, however, of vital importance not to repeat this drag on the implementation of a critical set of interventions that should help us to break the vicious cycle of unemployment, poverty and inequality. Hopefully we will see some of this determination in Wednesday’s address.
Hofmeyr heads the Policy and Analysis Unit of the Institute for Justice and Reconciliation. He is also editor of the Institute’s annual Transformation Audit. A version of this article appeared in the Cape Argus on 26 February 2013.