Budget's beauty in the balance

24 February 2017 - 09:54 By KENNETH CREAMER
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Finance Minister Pravin Gordhan and his National Treasury team should be praised for striking the correct fiscal balance in this year's Budget.

Gordhan understands that fiscal rectitude is necessary for the growth and transformation of South Africa's economy.

To maintain the fiscal balance, Gordhan will contain government spending and will raise the tax rates to be paid by well-off South Africans. He is also planning to sign up South Africa to international instruments which will make it harder for South Africa-based businesses to shift their profits offshore in order to avoid paying taxes in South Africa.

It is widely understood that there are limits to how far taxes can be raised, but in current circumstances it is preferable that Gordhan has chosen to raise taxes at the top end rather than to increase borrowing. Increased borrowing would raise the very real risk of South Africa falling into a debt trap, which would severely harm the prospects of our children and grandchildren.

Gordhan's fiscal rectitude will enable South Africa to retain a degree of policy sovereignty. He knows that, if South Africa falls more deeply into debt, the country's ability to determine its own policy direction will be compromised. Such a loss of policy sovereignty would limit the scope for interventions aimed at fundamentally improving the structure of the economy.

Gordhan has sent a clear message that government's programme of radical economic transformation must be based on sound economic and constitutional principles. He understands that policies not based on such principles will be doomed to failure.

Given South Africa's problem of economic and social exclusion, Gordhan seeks to use the Budget to ensure that economic transformation programmes have the widest possible effect and touch the lives of millions of poor South Africans, and do not just enrich a few.

He reminded South Africans that about two-thirds of the Budget each year - in this year's Budget about R1-trillion out of R1.5-trillion total expenditure - is used for the realisation of social rights such as education, healthcare, social security, housing, and water and sanitation services.

It is also hoped that the problems that have plagued the under-resourced higher education sector will be well on the way to being resolved now that the government has allocated considerable additional resources to it.

Gordhan projects that the rate of economic growth in South Africa will rise from 0.5% in 2016 to 1.3% in 2017. Although this is disappointingly low, South Africans can take heart that some of the main inhibitors of growth that have haunted the South African economy over the past few years have receded, such as low commodity prices, drought, industrial unrest, and unreliable electricity supply.

Many would have praised Gordhan if he had used the opportunity of this year's Budget to announce some specific targets to show improvements in the structure of the economy, which remains one of the most unequal in the world.

For example he could have announced a numerical target for a reduction in income inequality or a target for increased employment levels, especially for young people.

The transformation of South Africa's economy will only be possible if South Africa can lift its rate of economic growth and investment.

It is heartening that Gordhan announced important growth enhancing interventions such as bringing certainty to mining regulation, implementing the switch from analogue to digital television, continuing the independent power producer programme, streamlining investment approval processes, and safeguarding South Africa's investment-grade rating.

Furthermore, South Africa will benefit if steps are taken to curtail overcharging and anti-competitive conduct by dominant entities. Gordhan has made it clear that anti-competitive and monopolistic practices by banks and other large entities in the private and public sectors will not be tolerated.

Gordhan's Budget is a good one. It strikes the right balance - asking the rich to contribute a little more, while promising that government will redouble its commitment to using public resources more effectively to improve the lives of the poor and to transform South Africa into a more equitable society.

South Africans will take heart from Gordhan's Budget and will hope that it enjoys the full support of the cabinet and the government in general.

  • Kenneth Creamer is an economics lecturer at the School of Economic and Business Science, University of the Witwatersrand
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