EDITORIAL: A budget before the flood?
If Treasury can stave off the political turmoil, this budget might record a turning point, if not, it will be the calm before the flood
Finance Minister Pravin Gordhan will deliver the national budget on Wednesday in the most extraordinary circumstances, both nationally and internationally. Normally, the process of revealing the budget constitutes a feast for the technically minded. For economists, it forms a crucial part of the delicate art of setting down the complex levers of economic forecasting. For tax experts, it reveals the precise nature and dimensions of what will be owed by citizens to the state. For the financial markets, it defines an important part of the equation between buyers and sellers.
But this time, it’s different. Parliament is likely to swear in a new member, former Eskom CEO Brian Molefe, sometime in the near future. It’s hard to imagine a situation more poised. Gordhan could well be witnessing the arrival of his successor then, after this is gazetted and Molefe arrives in Parliament. This underlines why this budget, in a larger sense, is so unusual and distracted. Whatever Gordhan says will be seen and measured, not through the lens of normal budgetary arguments, but through the background politicking.
Were this all happening in an era of financial stability, it would be one thing. But it isn’t. SA’s economy has just stalled and nothing seems to be getting it to move again. Normally, it would be the opposition’s job to act as a countervailing force. But in this case, the divide has seeped into the ANC itself. Both sides within the ANC blame each other for their predicament. According to the shrill voices of the aggrieved faction, the Treasury is retarding "radical economic transformation" by withholding funds.
The Treasury has for years tried to quell this behind-the-scenes squabble by relaxing the fiscal bonds as much as it possibly can within the scope of formal rectitude, in the hope that the economy would over time come to its rescue. It didn’t.
Just one illustration of this process is a simple tally of the anticipated growth rate compared to the actual outcome. Over the past six years, the Treasury’s one-year-forward predictions have been remarkably accurate. But its predictions of economic growth two years hence, and especially three years hence, have been almost laughably wrong.
In 2010 for example, the Treasury was anticipating growth in 2013 of 4.4%. Instead, it came in at 1.8%. In 2011, it was anticipating growth of 4.2% in 2014. In fact, it came in at 1.4%. And so on, every year, the longer-term hope that the economy would recover just never happened.
Now, at the very moment that the Treasury needs strong leadership and solid unity to hold the ship together, the party is instead pulling apart. For the radicals in the ANC, the problem is not the direction government is going, but the fact that it isn’t going there fast enough. It leaves the Treasury in a gradually tightening noose.
What the Treasury has been careful to do is to keep SA’s expenditure and revenue moving in tandem even while allowing expenditure to increase as a proportion of GDP. What it has failed to do is to close the gap. As a result, SA’s national debt has been quietly building up and the international rating agencies have been getting more nervous.
The big problem has been the declining pool of tax gained from companies. As corporate profitability has decreased, tax on companies as a proportion of all tax has dropped from 30% of the total to 20%. In that 10-point drop lies a deluge of pain.
There is some hope now that the ship might be turning. Commodity prices have recovered somewhat and the international economic outlook seems less bleak even as the political outlook seems more unpredictable.
The result is a kind of bizarre hopefulness. If Treasury can stave off the political turmoil, this budget might record a turning point for the better. But if it doesn’t, then this budget might be a moment of relative calm before the flood.