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South Africa’s 2016 budget: long on promise but short on detail

South Africa’s Finance Minister Pravin Gordhan’s budget fell short on cost-cutting details. REUTERS/Mike Hutchings

South Africa’s 2016 budget: long on promise but short on detail

A great deal was at stake for South Africa when its Finance Minister Pravin Gordhan delivered his much-anticipated 2016 Budget speech. Jabulani Sikhakhane, deputy editor of The Conversation Africa, asked Jannie Roussouw, Uma Kollamparambil and Ingrid Woolard for their views.

Are the measures announced by the minister of finance adequate to deal with South Africa’s most pressing economic problems, such as removing stumbling blocks to greater investment by the private sector and higher levels of job creation?

Jannie Rossouw: The minister of finance is clearly relying heavily on expected savings to balance this budget. I want more details on these expected savings. There was insufficient detail provided and therefore their realism cannot be assessed.

Uma Kollamparambil: Although the budget succeeded in avoiding the much-dreaded increase in personal income and corporate taxes, the increase in the fuel levy is likely to have a knock-on effect on inflation. This will make further increases in interest rates inevitable which won’t bode well for greater investment by the private sector. Steps to minimise regulatory red tape are welcome but the biggest concern for investment is the state of the economy. There can be no better way to promote investment than by promoting economic growth. Explicit measures to promote growth and steer the economy on a new growth trajectory were missing. The market was disappointed as was evident from the sharp depreciation of the rand following the budget speech.

Ingrid Woolard: I think the minister did a good job under very difficult macro conditions. But the focus is on fiscal consolidation rather than doing anything new and innovative. He’s probably done enough to calm the jitters in the market but there’s nothing here that is going to radically improve growth or job creation.

What was missing?

Jannie Rossouw: The Minister had room to raise personal income tax and should have used the opportunity. Personal tax increases were widely expected and the opportunity should have been used.

Uma Kollamparambil: The budget missed the opportunity for ringing in big bang reforms. Given the sense of urgency among policy makers and the citizenry alike, this may have been the right time to undertake structural reforms in the economy. These could have included aggressive divestment of state-owned enterprises as well as reductions in the high level of market concentration that exists in most industries in South Africa. Increased competition in the private sector is essential to increase its international competitiveness.

Ingrid Woolard: There is almost no discussion of the carbon tax which I found surprising given that we’ve just had COP21 in Paris. The Budget Review says that the Draft Bill on Carbon Tax will be revised, but gives no hint as to what is being reconsidered. I had also hoped for a much stronger signal on the timelines for implementation of National Health Insurance.

Has South Africa done enough to avoid a sovereign downgrade?

Jannie Rossouw: Enough has been done at the moment, but the focus will be on the government’s ability to implement the budget. The deficit before borrowing of 3.2% of GDP will be a focus point. A downgrade might be triggered if this is exceeded. Clearly the financial markets did not like the budget, with the exchange rate of the rand weakening and the bond rate increasing. The final test will therefore be the 3.2% test: before borrowing, will this budget deficit be achieved in the final outcome of the budget?

Uma Kollamparambil: The budget has succeeded in reigning in the fiscal deficit and yet finding resources for high priority sectors like tertiary education, social and welfare grants, and health care reforms. This can be said to be its success. But it is not enough to convince the rating agencies about the immediate prospects of the country. To be fair to the minister of finance, not all the remedies required could have come from his jurisdiction. Reducing the size of the cabinet is really the prerogative of the president.

If the government is serious in its efforts to prevent a downgrade it must follow up the budget with further announcements.

Ingrid Woolard: Yes, I think so. It’s a prudent, credible budget. Debt and government spending are both being brought under control. I think the certainty around spending limits over the next three years will send a positive signal to the rating agencies.

Budgeting is always about balancing competing demands on limited resources. The most pressing demands in South Africa can broadly be grouped into higher economic growth and equity, including redress for the effects of apartheid on the majority. How well did the minister strike such a balance? If not, in which direction - growth or equity - is the budget tilted?

Jannie Rossouw: The minister managed to strike a balance, but more focus could have been placed on initiatives to stimulate economic growth and reduce unemployment. But the appropriate balance has been achieved under current difficult circumstances. Nevertheless I would have liked to hear about a clearer strategy on the way forward out of our current low-growth trap. Vague promises about expenditure reductions will not alleviate the constraints that have led to low growth.

Uma Kollamparambil: The budget really has not shaken the boat in any way to move it from the current trade-off between growth and equity. A tax on the super-rich to finance the tertiary education sector or the national health insurance initiative could have achieved greater equity with minimal impact on growth.

Ingrid Woolard: I don’t think there’s been much shift at all. I expected a little more of the redistributive side – the increase in the inclusion rate for capital gains tax is in that direction but I thought we were going to see an increase in the personal income tax rates at the top end in order to create a little more fiscal space for increasing social spending on education and health.

I’m a bit worried about the hiring freeze in the public sector. It’s not that easy to identify “non-critical” posts and it sounds like there will be lots of paperwork required to unfreeze posts. We don’t want departments hamstrung by HR paperwork and endless ‘processes’. Surely we need to see braver plans for restructuring to enhance efficiency rather than hoping that the ‘right’ jobs will be vacated through resignations and retirements?

Since 1994 South Africa has been announced numerous new policies to increase growth and improve government’s performance. It’s always fallen short on implementation. Does this budget signal any step change? Is there anything that shows a greater sense of urgency?

Jannie Rossouw: The budget shows some sense of urgency but still falls short on details of the implementation plans. In short, I expected more from the budget, specifically details of cost-cutting initiatives.

Uma Kollamparambil: The reallocaton of funds from historically under-utilised needs to new urgent needs - such as funding tertiary education - is indicative of the minister of finance’s no-nonsense approach. But ultimately the efficacy of how money is used is as important as how much is allocated. An emphasis on minimal expenditure with maximum impact should be prioritised much more urgently.

The centralised online procurement that will kick-start soon is an attempt to root out grassroots corruption and increase economies of scale in procurement. Whether this can fight corruption on a larger scale is yet to be seen. It is inevitable though that there will be hiccups at the beginning and these need to be addressed urgently.

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