Nene needs to grasp the nettle

Reflecting on Ralph Waldo Emerson's remark that "men are conservative after dinner", economist and philosopher Amartya Sen commented: "It is much harder to pursue conservatism when the belly is empty."

And so, with this frank insight, Finance Minister Nhlanhla Nene will, on Wednesday, present his ambitions for public finances amid tepid economic growth and sizeable, seemingly unyielding social need.

In a market economy, public finance choices can help reconcile the divide between what private firms produce and citizens require, particularly poorer communities.

Former finance minister Trevor Manuel articulated this elegantly in both the increasingly progressive nature of taxation and in the expenditure emphasis on social security. His successor, Pravin Gordhan, refined this melody.

Nene is mindful his submission to parliament reflects more than merely the mathematics of revenue and spending; it embodies South Africans' ideals and aspirations - and must also quell their fears.

It is the financial representation of a nation's yearning for improved welfare, and perhaps even prosperity.

Yet Nene will be equally aware that the challenges he faces are herculean.

In recent years, the management of public finances has become especially testing. There is even some trace of the trying episode when the ANC came to power in 1994, and South Africa faced a debt trap.

The hallmark of national finances since 2012 has been fiscal slippage. In other words, the government has consistently failed to meet planned outcomes. In part, this is attributed to weaker economic growth, which implied diminished tax revenues, and excess recurring expenditure, especially wages.

Symbolic of the fiscal deterioration, in February 2012, the government foresaw its debt as a percentage of the economy's size peaking at about 43%. Instead, indebtedness is now racing towards 50% of GDP. This has unnerved the agencies that pronounce on South Africa's status as an unfailing debtor, and in the view of Standard & Poor's, South Africa stands on the edge of sacrificing its "investment" grade.

It is therefore likely that when Nene steps to the podium, he will be mindful that he needs to be transformative. The national budget requires surgery, and he may even consider the following:

• South Africa's share of consumption taxes is less than 10% of GDP and is low relative to peers. For instance, Brazil, Turkey and Hungary boast consumption taxes in excess of 12% of GDP. In numerous Organisation for Economic Co-operation and Development countries, after more than a decade of stability until 2008, the average VAT rate rose briskly, to about 20%, to bolster revenues.

• An adjustment to the local VAT rate may be timely in light of the need for additional revenue, and a 0.5 percentage point increase, to 14.5%, could spawn more than R8-billion. Also, VAT is an "efficient tax" in that the cost of collection is relatively low, the hallmark of a good tax system.

• Personal income taxes, as a share of GDP, are slightly below the average of peer nations and suggest some scope for added revenue capture. This idea is bolstered by the disproportionate wealth gains flowing to higher-income individuals in recent years, aided by the spirited appreciation in house and stock prices.

• The value of households' net wealth in relation to disposable income has risen by more than 33% in the past 10 years, notwithstanding the recession in 2009. Still, the minister would be mindful that the personal income component of taxation is more onerous than in typically dynamic nations such as Mexico, Brazil and Thailand - and over-reach would be imprudent.

• In terms of expenditure, two areas require focus: the government's wage bill, and investment in infrastructure. The former is too high, the latter too low.

• The public sector wage bill is about 12% of GDP. This is extraordinarily high by peer comparison; nations such as Chile, Mexico, Malaysia and Indonesia spend less than half South Africa's level, and even Brazil (10% of GDP) and Turkey (8%) are lower. Admittedly, confronting this line item requires fortitude beyond only the finance minister.

• Meanwhile, public sector investment is shallower than among peer countries, but more concerted emphasis has been offset by the wage bill and spending on social protection.

The latter, of course, serves as an essential safety net for the poor, but it can also be an avenue for political opportunism.

Finally, Nene may conclude where he begins, mindful that another sovereign credit downgrade hangs over him like the sword of Damocles. South Africa's credit risk premium - the interest rate a lender to the government would require to specifically compensate for repayment risk - is about 1.8%, up from an average of 1.4% over the past 10 years.

Should the national budget fail to allay fears of runaway indebtedness, and Standard & Poor's lowers South Africa's credit status to subinvestment grade, the credit risk premium could leap to at least 2.4%, translating into an additional debt service burden of more than R2-billion each year - sufficient to make the finance minister weep.

Nene, like his predecessor, is one of only a few ministers to display a sophisticated pragmatism. And, like his forerunner, on Wednesday he must speak softly but wield a big stick.

Ballim is the chief economist for Standard Bank