Beware the low-growth trap

Pravin Gordhan
Pravin Gordhan

Finance minister Pravin Gordhan has crafted a mid-term budget that keeps spending and debt in check, but at the same time delivered a stark warning that SA runs the risk of slipping into a “low-growth trap” which would scupper its fiscal targets, strip the country of its investment-grade credit rating and make long-term policy goals unattainable.

By nearly doubling projected tax increases for next year, lowering spending ceilings and dipping into the contingency reserve over the coming two years, the policy statement that Gordhan unveiled on Wednesday managed to squeeze out an additional R33.86bn for universities disrupted by violent fees-must-fall student protests.

The package of measures, which include cuts to the operating budgets of national government, helps the budget deficit to dip below the key 3% of GDP level in fiscal 2018/19 – a year later than anticipated – while net debt projections nudge up to 47.6% of GDP in the same year, just above the prior forecast of 46.2%.

But Gordhan’s policy statement was punctuated by repeated warnings of the negative consequences of economic growth falling short of the Treasury’s latest revised estimates, which he pointed out has been the case since 2011.

Restoring confidence

For the first time, the mid-term statement included a fiscal risk assessment, presenting three possible scenarios and highlighting the threats posed by contingent liabilities of cash-strapped state-owned enterprises, and the possibility of steep public sector wage increases when an existing agreement expires in March 2018.

“Further deterioration of the economy could lead SA into a low-growth trap,” Gordhan said in the statement. “Taking no action to contain the budget deficit and stabilise debt could undermine the economy, but failing to do so could result in ratings downgrades, capital flight, and rapid exchange-rate depreciation and in the end higher interest rates.”

The Treasury said that its modelling indicated that if the trend rate of economic growth remains below 2% for an extended period, the government might not be able to sustain its policy commitments, and choices would have to be made over which programmes to expand public services could be maintained.

In order to restore the confidence needed for faster economic growth and to revive investment, the government also had to speed up the slow pace of policy reforms covering areas such as land reform, immigration, labour relations, mining and communication, it pointed out.

Unfortunately, all of these reforms must be implemented by other government officials and departments. At the same time Gordhan’s position is threatened by fraud charges which he is expected to face in court on 2 November, while the independence of the Treasury itself – one of the country’s most respected institutions – is under pressure from deepening rifts within the governing ANC.

The charges against Gordhan are seen as spurious and part of a sustained, covert bid by President Jacob Zuma and his allies, particularly the influential Gupta family, to raid government coffers and undermine the integrity of the institutions which uphold SA’s Constitution – including the Treasury, the Reserve Bank, the South African Revenue Service and the office of the Public Protector.

‘One government’

During an embargoed press conference ahead of his presentation of the mid-term budget to parliament, Gordhan put a brave face on his predicament, saying “what challenges?” in response to a comment from higher education minister Blade Nzimande, who also attended the briefing. “I might just be available for a job,” he added later.

Gordhan, Treasury director-general Lungisa Fuzile and deputy finance minister Jonas Mcebisi all took a much more upbeat stance in front of the media than in the budget documents, smiling and telling jokes. At one stage, Gordhan said he wanted to reassure everybody that the three of them were all sane, and focusing on what was best for SA.

In a reference to the political turmoil which has engulfed the country in the past few months, Gordhan said “Today it is the MTBPS [medium term budget policy statement]. We will talk about next week, next week.” When asked about the whereabouts of SARS commissioner Tom Moyane, who would normally be expected to attend the briefing, Gordhan retorted – “I choose who sits here.”

On a more serious note, Gordhan maintained that SA’s circumstances were not a catastrophe. “The environment is challenging but not impossible . . . I am not here to spread doom. We’re not in a hopeless situation,” he said referring to forecasts which see the economy growing at just 0.5% this year, 1.3% next year, and 2.0% the year after.

“It could get better than that, providing we do the things we need to do,” he said. Gordhan also moved to ease concerns that the government was at war with itself, emphasising that the Treasury took a “collaborative approach” to other government departments and that everything that happened had to be within the law.

“It is safe to say we are one government, operating under one Constitution and one Public Finance Management Act,” he said.

University funding

Part of the hefty increase in government subsidies to universities announced in the budget included R2.46bn in fiscal 2017/18 and R2.618bn in fiscal 2018/19 to keep fees flat for students from households earning less than R600 000 per year who would otherwise have to pay a fee increase of up to 8%. This took the burden off universities which needed to take that step.

However, militant university students calling for education to be entirely free are unlikely to be satisfied with the significant increase in government subsidies.

Nzimande said the focus in the medium term would be on creating technical colleges to focus on mid-level students. But money alone would not solve the problem – additional measures were required as 40% of students who received support from the National Student Financial Aid Scheme failed in their first year, he said.

“We as a society can’t expect government to provide everything,” Gordhan said at the media briefing. But he added that several “technical options” to help solve funding issues had been compiled by academics, business people and students, and that the Treasury was studying them. “This is not a government that is not listening,” he said.

Showing that he meant what he said, before addressing parliament Gordhan went outside the building to listen to protesting students and accepted a memorandum from them.

Gordhan was also upbeat on labour reforms, which are seen as vital for the health of business and investment. He pointed out that the number of strikes has fallen while plans were in the works for a minimum wage, long demanded by labour unions.

Gordhan suggested there might even be a “gift-wrapped package” emerging before Christmas from the collaboration between business, labour and government, which he has helped to drive.

But he noted that there were rising public perceptions that state corruption and rent-seeking had grown in recent years, which unless “combated with vigour” would corrode public trust in institutions and set back national development. As part of this effort a Public Procurement Bill would be presented to Cabinet before April 2017, which would empower the Chief Procurement Officer to conduct lifestyle audits and review transactions across the public sector.

Fuzile gave little further away on the topic of the government’s contingent liabilities and guarantees, which are seen as one of the main possible triggers for SA’s credit rating to be downgraded to sub-investment grade, or “junk” status by the end of this year.

At the end of fiscal 2015/16, they amounted to R469.9bn, while total guarantee exposure stood at R263bn. He sidestepped questions on whether public utility Eskom would derail the Independent Power Producer programme, after saying it was unwilling to sign new contracts.

He said a new policy would only be in place after the release of an updated Integrated Resource Plan (IRP), which has been subject to a lengthy delay. The IRP presents the country’s energy policy options and makes recommendations on them. Like all other government departments, the Treasury had the power to influence that process, Fuzile said.

Gordhan maintained that it was possible for SA to avoid a credit rating downgrade. “At the end of the day it’s working. If we do things properly we will satisfy the rating agencies – we are masters of our own destiny,” he told journalists. 

This article originally appeared in the 3 November edition of finweek. Buy and download the magazine here.

ZAR/USD
16.97
(+0.12)
ZAR/GBP
21.83
(+0.37)
ZAR/EUR
19.91
(-0.17)
ZAR/AUD
12.09
(-0.10)
ZAR/JPY
0.16
(+0.41)
Gold
1886.95
(+0.22)
Silver
23.97
(+0.90)
Platinum
876.01
(-0.30)
Brent Crude
42.88
(+1.08)
Palladium
2264.48
(+1.01)
All Share
54593.24
(-0.23)
Top 40
50412.03
(-0.33)
Financial 15
10018.43
(+0.87)
Industrial 25
73756.23
(-0.32)
Resource 10
53911.90
(-0.84)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 1383 votes
It depends on how the funds are used.
73% - 8964 votes
No. We should have gotten the loan elsewhere.
16% - 1980 votes
Vote