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  • The outcome of US fiscal policy debates
  • The timing of the US Federal Reserve’s “tapering” of its asset purchases
  • Volatility in capital flows to emerging markets
  • The undercapitalisation of major European banks
  • Lower commodity prices.

To these it could easily have added a number of home-grown risks, viz.

  • A current account deficit nearing 7% of GDP
  • A weakening and volatile rand
  • Inflation exceeding the upper limit of the inflation target on a sustained basis
  • The slow progress in addressing infrastructure bottlenecks, e.g. the electricity supply deficit
  • A stormy labour environment that refuses to settle down
  • The inability of the domestic economy to develop its own growth momentum.

The numbers, importantly, rely on continued expenditure restraint, with real non-interest spending increasing at just 1.9% per year over the medium term. Expenditure declines relative to GDP over the period – failing which the debt ratio is likely to continue rising. Also, we need a sustained firm business cycle upswing to support revenue (else we are likely to get higher taxes).

Since the release of the MTBPS in October 2013, events have indeed conspired to bring some of these risks home in no uncertain way. In particular, the nexus of Fed tapering, volatile capital flows, the current account deficit, rand weakness and higher inflation burst to the forefront in the past six weeks. The Reserve Bank has already responded by hiking the repo rate by 50 basis points, and further increases are to be expected.

In delivering this year’s national budget, the Minister of Finance indeed found himself between a rock and a hard place. On the one hand he is expected to find the resources to align the budget with the implementation of the National Development Plan; on the other hand he is faced with the enduring consequences of the fiscal mistakes of the past five years. He is also expected to position government finances with long-term strategic objectives in mind while he is facing a threatening short-term environment that requires an immediate response.

How then has the Minister fared in addressing all these challenges?

I am afraid I am underwhelmed by the budget speech. In fact, I find it rather uninspiring. Except for a few marginal items, it offers nothing new. It is perhaps in a sense a caretaker budget, with a new administration set to take over in just more than two months’ time, including possibly a new minister of finance as has been widely mooted.

As is to be expected in an election year, it dwells excessively on past achievements (as did the president’s State of the Nation address). It runs an extensive catalogue of known policy initiatives. It spends a disproportionate amount of time discussing administrative matters, e.g. tax and customs administration. It allocates more space to matters of social policy (a deliberate election strategy?) than hard-core economic policy.

In many instances the budget makes the right noises, but the follow-through is rather feeble. Although I find myself in agreement with some of the measures mentioned to improve the growth capacity of the economy, the amounts mentioned (for the full MTEF period, which makes them appear larger than they in fact are) are just not enough to make a significant difference.

But perhaps there is one paragraph in the budget speech that says it all: “This is a Budget in which circumstances dictate that we cannot add resources to the overall spending envelope. The emphasis falls therefore on ensuring that expenditure is allocated efficiently, enhancing management, cutting waste and eliminating corruption.” One would have liked to have assumed that this is standard practice in the public finances.

There is furthermore a real risk that the assumptions underlying the medium-term budget will prove to have been too optimistic. Already the National Treasury’s forecast for the economy to grow by 2,7% in 2014 is highly unlikely to be realised, with growth more likely to come in at 2% - 2,5%. The growth momentum going forward will then also be weaker and the forecasts for future years may also turn out to have been unrealistic.

The budget therefore does very little to strengthen South Africa’s defences against the risks mentioned above. Whether South Africa will be able to get away with this only time will tell.

The lack of a fiscal policy response means monetary policy will have to bear the brunt of any challenges that lie ahead, although I would contend that the absence of any excesses in credit-driven demand argues against this. Tighter fiscal policy in conjunction with more lenient monetary policy would arguably be preferable.

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