No pressure, Pravin, but you need to pull us out of the fire

21 February 2016 - 02:01
By Mills Soko

Gordhan’s budget this week needs to reassure investors that SA is no banana republic, and it must also pave the way for essential structural reform.

When Finance Minister Pravin Gordhan presents his budget this Wednesday, he will do so against the backdrop of national apprehension. Arguably, this will be the most important and anticipated budget since 1994. That our country is in deep economic trouble is common knowledge.

In the context of the convulsions in the Constitutional Court and at the opening of parliament last week - coupled with the collapse in international confidence precipitated by the axing of Nhlanhla Nene as finance minister late last year - South Africa will be looking to Gordhan to provide much-needed direction on how the government intends to turn around the struggling economy.


As a starting point, Gordhan will draw on Nene's medium-term budget policy statement, which he delivered in October last year. The statement highlighted the familiar problems that strangle the South African economy, including high unemployment, a high budget deficit, low growth rates and a volatile currency.

It identified the stabilisation of the ratio of gross debt to GDP - forecast to be at about 49% over the next three years - as the government's key fiscal objective. The statement noted that the decline in public finances would not improve unless the economy grew faster.

Since the medium-term policy statement was tabled, the global economic outlook has deteriorated. Commodity prices have fallen sharply, as have the prices of global stocks. China, a key pillar of global growth, has been experiencing an economic slowdown. The world's largest economy, the US, has been showing signs of weakness.

There has been downward pressure on eurozone growth. And money has been flowing out of emerging markets like South Africa, Russia, Turkey and Brazil.

Domestically, the effects of these global factors have been compounded by problems such as poor leadership, bad planning, drought, energy shortages, corruption and unstable industrial relations.

International financial institutions have revised their growth forecasts for South Africa and expect the economy to grow by less than 1% this year. And the spectre of a sovereign ratings downgrade to junk status looms large.

block_quotes_start Pravin Gordhan will have to navigate the politics of implementing economic austerity in an election year block_quotes_end

Mindful of these dangers to the economy, President Jacob Zuma outlined in his state of the nation address a number of measures aimed at reassuring the public as well as domestic and international investors.

These include a move to streamline and rationalise state-owned enterprises, and to reduce wasteful government expenditure.

Coupled with that has been the government's reaching out to the business sector, resulting in agreement on an eight-point plan that has been billed as crucial to stabilising state finances and averting a ratings downgrade.


The plan accepts tax increases in the 2016-17 budget, calls for better management of state-owned enterprises, advocates heightened fiscal consolidation, emphasises the importance of public-private partnerships, demands policy consistency and certainty, calls for reform of labour laws to ensure that they contribute to inclusive growth, supports the intensification of anti-corruption measures in the public and private sectors, and outlines business commitment to support the government in dealing with its fiscal problems.

The key challenge is whether these noble intentions will translate into a road map that can enable Gordhan's budget to ignite the revitalisation of the economy.

And the question on the minds of foreign investors, rating agencies and the public will be whether Gordhan's budget can rehabilitate the country's battered international credibility and restore confidence in the government's economic policies.

Gordhan is expected to address a range of contentious issues, including the debt-to-GDP ratio, the public sector wage bill, taxation, higher education funding and fixed public sector investment.

He will also have to navigate the politics of implementing economic austerity in an election year and in a global setting in which many governments are spending their way out of economic trouble.

Gordhan's budget might well succeed in assuaging financial market concerns and buying the government time. If that happened, it would be a great achievement. Yet there is no doubt that structural reform is essential to transforming South Africa's long-term economic fortunes and addressing some of the most pressing challenges. I will highlight five of those challenges.


First, the government's macroeconomic policies have not been sufficiently supportive of growth, and have allowed large budget deficits to persist. The latter have stemmed primarily from large increases in the public sector wage bill rather than from public investment.

There is a need to redesign South Africa's macroeconomic policies to provide a better base from which to stimulate growth. It is encouraging that the government has committed itself to cut unnecessary spending as part of efforts to reduce the structural budget deficit.

Second, the unemployment rate remains alarmingly high by global standards. A quarter of South Africa's economically active population is currently unemployed. Worryingly, the bulk of the unemployed are among the youth. Youth unemployment exceeds 50%. The current level of job creation in the economy is too low to make inroads into reducing the level of unemployment.

Linked to this is the reality that many South Africans are unskilled and unemployable. This is a major cause of the persistently high unemployment rate and a key contributor to income and wealth inequality.

Our country also has to contend with skills shortages as well as mismatches between the skills profile of the labour force and the skills demanded by industry.

Third, there is a need to address the high regulatory compliance costs faced by businesses. Red tape and excessively onerous regulatory requirements in areas related to business registration, taxation, labour legislation and tender processes have been found to be particularly problematic.


According to Grant Thornton, 30% of South African business owners see over-regulation as a major constraint to business growth. Burdensome regulations impose significant efficiency costs on the economy, discouraging both growth and job creation. Also, the costs of regulation and the adverse impact of red tape on business growth fall disproportionately on small businesses.

Fourth, the low level of entrepreneurial activity in South Africa must be tackled. According to the Global Entrepreneurship Monitor, the percentage of the South African working-age population involved in entrepreneurial activity is significantly lower than in comparable economies such as China and Brazil.

South Africa has also fared poorly in the monitor's measure of the prevalence of established business owner-managers who are actively involved in business start-ups.

Lastly, the level and quality of infrastructure development has not been sufficient to effectively support rapid economic growth and attract much-needed investment.

A significant increase in expenditure on infrastructure development is required to address the backlogs.

South Africa is at a crossroads. This week's budget provides an opportunity for the government to restore credibility to its economic management, and demonstrate that it has a clear vision and plan to stave off the economy's long-run decline. Whether Gordhan's budget will rise to this challenge remains to be seen.

Soko is an associate professor at the University of Cape Town's Graduate School of Business