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On My Mind

– Gordhan’s Budget: no boost for growth

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Daniël Kriel

Former CEO of Sanlam Private Wealth

Radical economic transformation. Inclusive growth. We hear these concepts being bandied about by politicians on an almost weekly basis – they were at the core of President Jacob Zuma’s recent State of the Nation address. We heard them again last week in Finance Minister Pravin Gordhan’s Budget Speech. But whereas Gordhan should be commended for vowing fiscal discipline in a treacherous political environment, our Finance Minister failed to deliver any viable strategy to address our country’s most pressing economic problems. In fact, there was very little of a transformative nature, let alone radical transformation, in the Budget that would serve to stimulate our economy and boost stagnant growth.

Gordhan and his team certainly had a tough task of balancing the government books at a time when the local economy is under severe pressure. In the main, commentators and even sovereign credit rating agency Standard & Poor’s (S&P) reacted positively to Treasury’s pledge to keep a lid on the budget and maintain fiscal discipline. Closer scrutiny of the numbers tell a different story, however – they reveal a government with very little room to manoeuvre: a government which is, in fact, rapidly running out of money.

According to Gwen Ngwenya and Frans Cronje of the Institute of Race Relations:

  • Tax revenue as a proportion of GDP has increased from 21.9% in 1994/95 to a projected 30% in 2017/2018
  • Government expenditure as a proportion of GDP has increased from 26.4% to a projected 33% over the same period
  • Government debt levels have escalated from 26% of GDP to just over 50% from 2016/17, and the cost of servicing this debt has been forecast to grow to 11% in 2019/20.

In addition to these dismal numbers, the Finance Minister admitted that 35% of the labour force are unemployed or have given up hope of finding work – a figure considerably higher than the official 27%. To top it all, it appears the efficiency of the SA Revenue Service (SARS) has taken a severe knock – Gordhan indicated last week that revenue collection was lagging dangerously behind estimates. He cautioned that strengthening the capacity of SARS was vital for our country’s fiscal health.

Where Budget 2017 has fallen seriously short is indicating how GDP growth – projected by Treasury at below 1.5% for 2017 – can be boosted. Gordhan himself pointed out that transformation without economic growth would be ‘narrow and unsustainable’, but he provided no meaningful incentives or stimulus that would create jobs or lend support for growth initiatives.

Yes, Gordhan should certainly be commended for his ongoing efforts to protect Treasury against capture by Zuma and the Gupta family. But his main task as our Finance Minister – besides protecting the national purse – is to ensure that South Africa’s resources are allocated in the most efficient way, and to introduce investment-friendly structural reforms to reduce our unemployment rate and boost growth. And in this endeavour, he has missed the mark, in our view.

One way of rejuvenating our flagging economy is to dramatically cut imprudent expenditure and eradicate corruption. The place to start is the many loss-making state-owned enterprises (SOEs) that are sucking our country dry. Treasury has, however, increased government guarantees to SOEs to R477.7 billion in the new financial year (2016/17: R469.9 billion).

A case in point is SAA, which has cost the state coffers billions in bailouts over the last few years. The days of a national airline being a government status symbol are long gone – there’s no reason why SAA and other inefficient SOEs can’t be privatised, which would reduce a major drag on our economy. As this appears to be as politically unsellable as an increase in VAT, the Finance Minister has indicated that the R1.2 trillion asset base of our SOEs could be used to partner with private investors – but the enterprises would have to address their governance and operational management issues. We can only hope that current efforts by government and business in this regard will succeed, since our country can ill afford yet another year of extravagant subsidies to unprofitable SOEs.

Going after those who create the wealth in this country through wealth taxes such as personal income taxes, dividend taxes, capital gains tax and estate duty as Gordhan has done, is shortsighted, in our view. It may well have the consequence of more wealth leaving our country. Continuing to tax the wealthy, who are the people in a position to save and invest, and create employment in this country, may see these individuals – often entrepreneurs creating jobs – being pushed out of South Africa to greener pastures. (Although I’m sure many won’t mind paying higher taxes if they knew the money was being spent effectively and efficiently. The hard reality is, however, that the increased revenue will likely not be invested, but will be put to use in servicing government debt.)

Besides waging war on wasteful expenditure, Treasury’s focus should be on accelerating economic growth. Structural reform is required to make South Africa attractive as an investment destination and to draw the foreign direct investment so desperately needed to kick-start our sluggish economy. Again, the political will to implement such reform appears to be sorely lacking, and neither Zuma nor Gordhan has announced any clear strategy to attract global entrepreneurs or corporates to our shores.

On a more positive note with regard to this year’s Budget: an excellent proposal by Gordhan is the provision of additional bursary support to employees earning up to R600 000 a year. If employers provide bursaries to employees or their relatives – up to R60 000 for university students and R20 000 for school – those bursaries will be tax-free. This is indeed wonderful news and will certainly contribute to addressing South Africa’s current education crisis.

In conclusion, there’s not much to get excited about in Budget 2017. To be fair, the Treasury team has been working under tremendous pressure of late, as evidenced again this past week by the news – and subsequent denial – of an investigation by the Hawks of Deputy Finance Minister Mcebisi Jonas.

We’ll no doubt witness increased political infighting and turbulence in the run-up to the ANC’s consultative conference in June and the party’s leadership elections at the end of the year. In this highly charged and unpredictable environment, Gordhan and his team deserve our support. However, the Finance Minister will have to up the ante in terms of putting in place effective measures to boost the economy if real transformation is to take place. It’s to be hoped that this may yet happen under new leadership later this year.

(Also see the commentary on Budget 2017 by our Director of Investments, Alwyn van der Merwe, and our Fiduciary and Tax team.)

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