Slow growth and shrinking revenues limit South Africa’s finance minister

South Africa’s finance minister Pravin Gordhan in a balancing game Sumaya Hisham/Reuters

South Africa faces falling revenues and very slow economic growth. Managing the economy with these two negative factors presented the country’s finance minister Pravin Gordhan with a particularly tough challenge in his medium-term budget. The Conversation Africa business and economy editor Sibonelo Radebe asked Sean Muller for his views.

What is your general reaction to the minister’s statements?

It is important to note that, as its name indicates, the Medium-Term Budget Policy Statement is a policy statement indicating intention over the medium-term – the next three fiscal years from 2017/18 to 2019/20. It does not provide the extensive detail that accompanies the national Budget.

With that in mind, the Minister’s statements indicate clear intent to maintain ‘fiscal consolidation’, which basically means stabilising our national debt levels relative to GDP by reducing growth in expenditure and raising more revenue where necessary. The announcement that an additional R28 billion (R13 billion in 2017/18 and R15 billion in 2018/19) will be raised through new revenue measures is critical, but no detail is provided on what those measures might be.

The increased allocation to higher education is clearly a response to #FeesMustFall. While protesters may be unhappy that this does not come close to providing fee-free education, it could contribute to significantly reducing the hardship experienced by the most underfunded students. Again, the details will be crucial.

I should add that the MTBPS is accompanied by the mid-year ‘adjustments Budget’, which deserves more attention than it usually receives.

Could he have done better and how?

Although it is trite to say it, the minister is always faced with very difficult choices and so there are rarely obvious improvements that can be identified.

The fact that revenue collection for 2016/17 is now expected to be R23 billion less than originally forecast is an indication of the challenge posed to public finances from slow economic growth. Besides additional revenue measures, the medium term budget responds to this by proposing cuts to the government “expenditure ceiling”: R10 billion in 2017/18 and R16 billion in 2018/19.

One area of concern is the reduction of expenditure by reducing the number of government employees. Given our employment challenges it might be preferable to reduce wages and retain posts. However, the Minister’s hands are tied by public sector wage agreements.

The medium term budget does contain statements about additional allocations to health and education for this reason, as well as a conditional grant for social workers. But it would be reassuring to see actual evidence that it is unnecessary, overpaid bureaucrats being reduced rather than frontline public servants such as nurses and teachers.

What should be done to address the higher education crisis in the long term?

The first thing is to confront some politically unpalatable realities. Too many students are being pushed into the system and a significant proportion are inadequately prepared. Furthermore, parts of the academic system itself are of dubious quality. These factors compound, and are compounded by, inadequate funding for students who need financial assistance. A balance needs to be found with enrolments into different forms of post-school education that does not sell young people false hope. And somehow we need to provide support, and create job opportunities, for those outside of post-school education.

With these caveats, #FeesMustFall activists could usefully focus on two core issues. First, whether the National Student Financial Aid Scheme’s means testing formula is adequately identifying and prioritising those most in financial need.

Second, the extent to which new funding announced in the 2016 Budget and in the medium term budget addresses the historical failure of the National Student Financial Aid Scheme awards to cover the difference between students’ ability to pay and the full cost of study. The Department of Higher Education and Training had costed some solutions to both issues and those could form a useful basis for constructive discussions to agree on a phased-in solution.

What do you think credit rating agencies are taking out of this budget?

The fact that Pravin Gordhan delivered the medium term budget was probably more important than what was in it. Although national debt levels have grown quickly since the financial crisis, they are not yet at obviously unsustainable levels. It is not ideal that the promised “debt stabilisation” keeps getting pushed to later years, but the high-level commitments in the medium term budget indicate a clear intention to keep debt at manageable levels.

The two major threats are economic growth and political factors. If growth does not increase soon then it will be hard to meet debt targets without expenditure cuts and/or further taxes that are economically, socially and politically risky.

The political factors relate to the many serious threats to public finances that would become likely if the minister of finance was replaced, and/or institutions the ministry is responsible for, like the South African Revenue Service, are compromised.

The minister’s unwavering commitment to his public mandate has, furthermore, resulted in attempts to evade such oversight. The continued efforts to push through a nuclear deal, premised on dubious arguments and seemingly more dubious motives, using power utility Eskom is one example.

Given the prevailing political environment do you think he will achieve what he has set out to do?

The minister cannot save South Africans from failures in other parts of our democratic system, even if he wants to. The question is whether he is doing all he can to protect and responsibly use public finances. Broadly speaking, that seems to be the case.

Given that, whether as a country we achieve the goals of stable public finances, faster economic growth and better social and economic outcomes for all citizens will depend on what happens in other parts of the state. With battles being fought across a wide variety of public institutions, and within the majority party, it is still hard to discern what will happen. That ambiguity alone could be used as justification for a ratings downgrade, yet that is clearly outside the minister’s control. It is up to other parts of society to remove this ambiguity for the better.

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