SA needs to rediscover faith in itself

Finance Minister Pravin Gordhan showed a climber's instinct in navigatng the ledge SA finds itself on politically and economically, writes Craig Dodds.

Don't look down. That is what they say you should do when standing on a ledge above a bottomless chasm.

Instead you should focus only on the mechanics of getting safely off the ledge, moving hands and feet with clarity of purpose, never disturbing your balance.

It's not clear whether Finance Minister Pravin Gordhan has ever climbed Everest but he has the climber's instinct for keeping his eye on the summit, not the abyss below.

Because a ledge is pretty much where the country finds itself right now, politically and economically.

Gordhan, whose job is not for excitable temperaments, preferred to call it a crossroads.

The numbers in the Medium-Term Budget Policy Statement (MTBPS) tell their own story, of how low growth has eaten into government revenue, compounded by the shrinking of the tax base, undermining efforts to close the gap between what the state collects in revenue and what it spends, in order to bring borrowing under control.

There is already evidence of how the brakes applied to government spending since 2012 have reined in growth in the public service headcount - such as schools that have been forced to trim teaching and support staff, for example.

And that is before even more vigorous belt-tightening takes effect next year, when expenditure reductions climb to R20 billion, on top of the R25bn imposed over the past two years, followed by an eye-watering R31bn in 2018/19.

The government will reduce the operating budgets of all departments by 1.1% over the next three years and trim transfers to public entities by R5.6bn, large conditional grants by R6.4bn and provincial equitable shares by R1.58bn to realise R18.7bn in savings.

Among the grants affected are those supporting maths, science and technology, education infrastructure, health facilities, community libraries, human settlements 

development, agriculture, public transport, water services infrastructure, municipal infrastructure and urban settlements development.

In some cases, these grants have been underspending anyway, so the cuts may not do much damage, though they will limit the scope for improvement.

But a combination of above-inflation salary increases and a cap on personnel budgets means something will have to give in education, health and policing and, while natural attrition may account for most of it, there will be job losses.

Proposed new tax measures, on the other hand, add up to R43bn over the next two years, with the biggest hit coming next year in the form of R28bn in additional revenue to be sought by the state.

As Gordhan put it in his pre-speech press conference, we're all going to have to swallow something - and it won't be of the alcoholic variety.

But the real concern is economic growth, not only because it has consistently made forecasts seem naively optimistic, but because, as the Treasury points out in the MTBPS booklet, trend growth - the long-term average - has dropped from 4.3% between 2000 and 2008 to 2.1% between 2010 and 2018 (if forecasts hold).

That spells trouble for a country with an unemployment rate equivalent to a humanitarian disaster and a youth bulge delivering increasingly larger waves of school leavers on the desolate shores of a stunted post-school education and training system and a job market especially hostile to low-skilled entrants.

The reasons for this drop in trend growth can be found, among others, in an 11.3% fall in fixed capital stock between 2008 and 2015, i.e. de-industrialisation.

“If investment is insufficient to replace worn assets, the resulting capital erosion can weaken the economy's growth potential, with negative consequences for job creation,” the Treasury noted.

Whether this retreat of capital investment should be laid at the door of depressed commodity prices, electricity supply constraints since 2008, or shattered business confidence, or all of the above, is a matter for debate, but it is clear that unless the investment trend is reversed, the growth trend will remain stuck around the 2% band.

What is more, the entire edifice of Gordhan’ delicately balanced fiscal consolidation plans is predicated on growth surpassing the 2% mark sometime in the near future. Failing this, even existing spending commitments will come under threat as it becomes ever harder to control rising debt, the costs of which are already the fastest-growing item in the budget.

This is a polite way of warning that the dreaded fiscal cliff looms - which could impose severe cuts on social spending and government bureaucracy - unless growth picks up soon.

So while there have been howls in some quarters (those that support President Jacob Zuma's view that there was “nothing wrong” with his madcap shuffling of finance ministers in December) over the abdication of sovereignty implicit in attempts to stave of a ratings downgrade, the real loss of sovereignty would come if South Africa, like the “several African countries” mentioned in Gordhan’ speech, were forced to go begging from international financial institutions. That assistance would inevitably come with conditions attached, the ravages of which countries like Greece can attest to.