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South Africa’s finance minister is caught between a rock and a hard place

South Africa’s Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas have their work cut out. Reuters/Mike Hutchings

South Africa’s minister of finance, Pravin Gordhan, presented the 2016 mid term budget in a politically toxic and economically challenging environment. The Conversation Africa business and economy editor Sibonelo Radebe asked Fatima Bhoola about key highlights of the speech.

What is your general impression of the medium term budget speech?

This certainly has to rank as one of the most difficult speeches the minister has had to deliver to date. Despite the controversy related to the allegations brought against him by the National Prosecuting Authority, his speech was promising in trying to meet some of the key economic challenges faced by the country.

South Africa faces a myriad of challenges. These include near zero growth in output, political uncertainty, inflation that has breached the upper limit of the country’s inflation target, and a possible credit downgrade.

Could he have done better and how?

The minister faces a tough dilemma. He needs to curb spending to consolidate the budget and reduce the national debt to GDP ratio. Not undertaking the necessary remedial measures to stabilise the burgeoning deficit could be the catalyst for a credit rating downgrade. This in turn would lead to capital exodus and higher interest rates which would further hamper growth prospects.

But reducing spending could also affect the country’s growth prospects even further.

Although the minister touched on the structural reforms needed to boost growth, sadly his speech did not show full commitment to putting measures in place to ensure that the reforms would be realised. He also failed to provide details on how a viable private-public partnership could reduce the burden of state owned enterprises.

In addition, his stance on the contentious nuclear energy deal and the burden it would place on the state left much to be desired.

What do you think credit rating agencies made of the medium term budget?

For the past eight years a persistent budget deficit has meant that the government has had to borrow to finance some of its spending. While credit rating agencies consider a number of criteria in evaluating the credit worthiness of a country, the most pertinent are: GDP growth, inflation, external debt and default history. Growing debt is thus perceived negatively by creditors and monitored closely by ratings agencies who question the country’s ability to repay its debt. This ultimately leads to higher interest rates to compensate for the possible risk of default. Higher interest on debt further exacerbates the deficit.

These concerns have left the minister with no choice but to propose measures in an attempt to avert a possible sovereign rantings downgrade. But these very measures could hinder the country’s short term growth prospects. The minister tabled two proposals in particular, the reduction in the expenditure ceiling; and tax measures to raise additional funds in the next three years. These are expected to help reduce the consolidated budget deficit from 3.4% of GDP in the current year to 2.5% by 2019/20. They are also expected to stabilise net national debt by the end of the 2019/20 fiscal year.

Has he done enough thinking and action around higher education funding?

Given the constrained parameters he faces the minister has shown some commitment to try and address the ongoing challenges. The crux of the matter is that poor students face enormous financial challenges trying to access higher education.

The minister’s initiative to increase the contribution to the national student financial aid scheme as well as increase the number of state bursaries available is a positive move. He also highlighted initiatives that are underway to address the higher education funding crisis. But it would have been refreshing if he’d elaborated on proposals being considered.

In all honesty, the call for free education cannot be realised overnight. But the #FeesMustFall Movement should serve as a wake-up call to government. It needs to prioritise funding for higher education. Forming endless committees to address issues of funding is pointless unless the government is committed to doing this.

Under the current constraints the only way that higher education funding gap can be alleviated is by redirecting funds from wasteful expenditure. There is an enormous amount of wasteful expenditure which is putting undue strain on the budget. Redirecting these funds to productive areas would benefit the economy immensely.

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