South Africa’s budget: some good moves, but not enough to fix mounting problems

South Africa’s Finance Minister Pravin Gordhan delivers his 2017 budget speech. Reuters/Mike Hutchings

South Africa’s finance minister Pravin Gordhan delivered the country’s annual budget amid growing concerns about slow economic growth, the unequal distribution of wealth and a widening budget deficit. The Conversation Africa’s Sibonelo Radebe asked Lumkile Mondi and Jannie Rossouw to shed light on the the minister’s speech.

Is the budget on the same page with ambitions expressed in President Jacob Zuma’s state of the nation address?

Lumkile Mondi: There is broad agreement in South Africa that the country’s high levels of unemployment, poverty and inequality need to be eradicated. But there are disagreements on how this should be done as could be seen in the different approaches adopted by the president and his finance minister.

In his address Zuma spent a lot of time on the theme of radical economic transformation . He defined this as making fundamental changes in the structure, systems, institutions and patterns of ownership, management and control of the economy.

Given his history the president’s reference to “fundamental change” can be interpreted as a sustained resolve to use crooked and unconstitutional means to squeeze the public sector through state capture. This is in keeping with a president that broke the oath of office.

The finance minister spoke about radical economic transformation with a different tone. He referred to the need to address unemployment, education and training in order to adapt and ride technological changes and the creation of an enabling environment for micro, small and medium businesses.

And the minister sounded a warning against seeing the state’s coffers as a bottomless well.

Jannie Rossouw: The state of the nation address set the tone for radical economic transformation. The budget speech followed this theme, the clearest sign being the introduction of some forms of wealth tax. I view the increase in the top marginal tax rate to 45% as well as a sharp increase (by a third from 15% to 20%) in dividend withholding tax as wealth taxes. South Africans can expect more wealth taxes in years to come.

The fact that the finance minister devoted a significant amount of time and space to talk about radical economic transformation tells us that this will remain a recurring theme for the rest of the current term of the government. Since the municipal elections in 2016 the government has clearly moved its policy stance in this direction. This is evident by the more rapid redistribution from the wealthy to the poor.

What do you make of the country’s fiscal position?

Lumkile Mondi: The state finds itself in the same position as it was in 1994. With the ratio of debt to gross domestic product (GDP) at 50,3%, the state’s ability to meet its goals of reduced unemployment, poverty and inequality as espoused by its longer term economic plan, the National Development Plan, is becoming illusive.

This is not being helped by growing global uncertainty and the inward focus of protectionism emerging from the US.

The minister announced an increase to 45% in the personal income tax rate for those earning more than R1.5 million a year. This shows that South Africa is finding it difficult to meet its social expenditure and infrastructure development needs. The country cannot continue squeezing rich individuals and so it may have to increase corporate taxes. This would be equal to killing the goose that lays the golden egg.

Jannie Rossouw: South Africa’s fiscal position remains tight. The only way forward is a continued moratorium on hiring more civil servants and their annual salary increases shouldn’t exceed the rate of inflation. Civil service remuneration is the government’s single biggest expenditure item, accounting for more than 40% of government revenue.

What did you make of the minister’s statements on state owned enterprises?

Lumkile Mondi: In the state-of capture report, South Africans got a glimpse of how their hard earned income is being misused by state owned enterprises. As such there is a general mistrust in society towards the state’s governance framework, capability and accountability. Over time this could erode confidence in the political system and key institutions of society.

I was surprised that the minister did not mention the need to privatise some of them to strengthen the public finances. Entities like the Airports Company of South Africa and South African Airways can be easily privatised. This would provide the state with much needed capital to reduce its debt burden.

There is clear evidence that state owned enterprises contribute to bottlenecks that compromise competitiveness in key sectors such as transport, energy, communications and water. The state should therefore focus on reducing its stranglehold on the economy. The country should also be looking at public-private partnership in areas of weakness like water, roads and power.

Jannie Rossouw: State owned enterprises simply cost too much and those that are financially unviable should simply be given away.

What do you make of initiatives to boost growth?

Lumkile Mondi: I read through the budget looking for where growth could come from without success. There is very little that is growth enhancing in it. Perhaps the South African government sees its centralised procurement system as a source of growth?

On top of that, savings are going to be discouraged by the tax burden on high income earners and the increase in the withholding tax on dividends. And by emphasising the expenditure trajectory instead of focusing on savings to reduce debt and the attendant debt service costs, government is compromising future capital investment spending and social protection.

South Africa urgently needs a growth strategy. This should emphasise structural economic reforms in the product and service markets, particularly where the state has a strong presence such as the transport and electricity service sectors.

There is also an urgent need to address rigidities in the labour market, with a huge focus on productivity. These will require companies to invest in skills, training and knowledge.

Jannie Rossouw: This budget was about redistribution, not growth. There wasn’t anything in it about how the country will change its current low growth trajectory. The government is clearly viewing redistribution of wealth as a strategy to increase growth prospects, but this isn’t sustainable.

South Africa clearly needs a new growth strategy, as the government pays only lip service to the National Development Plan. Such a new plan should focus on, among others things, deregulation to improve the investment environment. This strategy should also focus on aspects such as improving basic education to enhance the likelihood of school leavers finding employment. Unemployment remains a major challenge facing the country and it needs initiatives to address the problem.

Higher economic growth is a prerequisite for the government to alleviate its current fiscal constraints. Government revenue closely follows nominal increases in GDP, so growth is necessary to ensure long-term fiscal sustainability.

What do you make of the the extra R5 billion funding, on top of the R32 billion previously announced, for higher education?

Lumkile Mondi: Higher education should be a pillar for government, firms and society in economic redress. More broadly, the education sector is key to building a growth enhancing and labour intensive economy where education is directly linked to economic strategy within a national system of innovation. South Africa would do well to adopt a national system of innovation, a framework that takes into account two important and interrelated issues. On the one hand it is used to show international differences or similarities in a country’s ability to innovate and be on the cutting edge of technology. On the other it can be used to give policy suggestions to support firms’ innovative activities.

Jannie Rossouw: Naturally any increase in education expenditure is to be welcomed. In reality, however, this increase is too small to make real inroads into the funding needs of tertiary education institutions. It is therefore clear that the government has no solution for the demands for free education.

But in an environment of subdued economic growth – which translates into low revenue growth for the government – demands for additional expenditure can’t be accommodated. It will only be possible to address challenges in the funding of higher education when South Africa once more experiences rapid economic growth.