Tito Budget - ICON
Posted on 25 February 2021 by Sean Gossel
Political Economy

Mboweni says he has hope, but without critical reforms this is likely to fade fast

Even before the onset of the health crisis, SA’s economy was already hurtling toward disaster. But the move to zero-based budgeting and limiting endless SOE bailouts provide possible silver linings.


Even before the onset of the health crisis, SA’s economy was already hurtling toward disaster. But the move to zero-based budgeting and limiting endless SOE bailouts provide possible silver linings.

In a time of crisis such as the pandemic we are facing, in which growth has all but collapsed leading to huge job losses and lower tax revenues, budget speeches can be Rubicon-esque in importance. They can provide an administration with a chance to reset, chart a new path for economic prosperity, and lift the spirit of the nation.

Yet in SA where crises have almost become commonplace, budget speeches tend to be predictable and uninspiring, not least because implementation is always lacking. The speeches are more or less a game of numbers, without the finer details about implementing crucial reforms necessary to fire up the economy.  

The hard reality is that only a growing economy can address most of the challenges SA is facing. And to grow the economy, macroeconomic and structural reforms in key sectors such as energy and transport are an absolute imperative. Structural reforms to boost competition and infrastructure, restructure SOEs, eliminate corruption, and tackle skills training and education challenges are key ingredients to reignite the economy. 

Without such measures, South Africa will not be able to achieve the growth it needs, and its fiscal challenges will remain. Government has in recent times been hiding behind the pandemic and global factors, blaming these for its lack of bold policy choices, and Wednesday’s budget speech mirrored this once again.

While Finance Minister Tito Mboweni’s speech had some good news, such as limiting the imposition of higher or new taxes (of course sin taxes were going to go up), and reducing the corporate tax rate, for the most part, in terms of tackling SA’s budget deficit and massive debt load, what remains uncertain is whether the Minister will manage to push through much needed measurers to reduce the wage bill, to wean SA's struggling state-owned enterprises off the fiscus, and to create an investment friendly environment that will lead to higher and more inclusive economic growth in the year ahead.

Before COVID-19 hit, ratings agencies cited SOEs, including Eskom and SAA, which carry debts of close to R700bn between them, as among the major risks to the sustainability of the nation’s finances. So too the wage bill, which still threatens to widen the budget deficit and lead to higher levels of government debt. The wage bill remains a major headache for the state amid tough negotiations between government and public sector unions. Average remuneration in the public sector is higher than that in the rest of the economy. For every R100 the state collects in tax revenue, nearly half of that is spent on paying the salaries of public servants and R20 goes to servicing debt, which leaves very little for the expansion of the country's productive capacity. This is unsustainable. Therefore, expenditure cuts, reducing wasteful expenditure, and clawing back the billions of Rands looted from the economy cannot be over-emphasised, especially in a stagnating or shrinking economy.

In addition, much of the R2 trillion budget hinges on the speed of the post-COVID economic recovery with an expectation that South Africa will only return to stagnant pre-COVID economic growth levels in 2023/2024. However, it should be borne in mind that government has consistently over-estimated the country’s economic growth rates so it is likely that the country will only recover even later. This has significant implications for debt stabilisation, which is hoped to level at 89% in 2025/2026, and unemployment, which varies between 32% to 50% depending on demographic and provincial factors.

Looking ahead, fiscal consolidation alone will not reignite economic growth. Even before the onset of the health crisis, SA’s economy was already hurtling toward disaster. Now, its finances have been further stretched, due to funding needs to finance the vaccine programme (which could cost the state up to R20 billion), expanding state-assisted employment by R11 billion, the National Youth Development Agency by R1.4 billion, and the emergency COVID-relief grant by R2.1 billion.

Possible silver linings, however, are closing the curtain on endless SOE bailouts (except for recapitalising the Land Bank at R9 billion over the next three years) and the move to zero-based budgeting. Zero-based budgeting is an approach that requires all expenses to be justified for each new period. It starts from a zero base and every function within an organisation is analysed for its needs and costs.

Wednesday’s budget, coming soon after the lacklustre State of the Nation address by President Ramaphosa suggests that policy direction is increasingly shifting from the presidency to the finance cluster. Although this shift could potentially insolate President Ramaphosa from the political fall-out of unpopular decisions, it could also be viewed as an admission that as a result of ANC factionalism, Ramaphosa is a lame duck.  

Sean Gossel is an Associate Professor and Assistant Deputy Director of the UCT Graduate School of Business. 


MORE ON Political Economy

Ghai - media
Political Economy

Yes, there is unity in diversity, and talking about it makes us strong

UCT GSB MBA alumnus, Shivani Ghai, says creating a safe space for talking about difficult topics is an important way to foster unity in a divided world.

Read Article
Posted on 7 August 2020 by Shivani Ghai
IE_Media_8Aug2020_lats tap into
Political Economy

Let’s tap into the defiant optimism of our young people this Youth Day

As protests around structural inequality and racism rage across the world, we need to re-ignite efforts to give young people a voice at all levels of society, but especially as leaders.

Read Article
Posted on 15 June 2020 by Camaren Peter
Sean Gossel
Political Economy

Mboweni's 2020 budget speech draws the battle lines

With the economy on its knees, government’s latest budget speech expects unionised labour to share the pain. If history is a guide, the plan is unlikely to yield the desired results.

Read Article
Posted on 28 February 2020 by Sean Gossel
ramphosa
Political Economy

More broken promises and unmet plans will not deliver the country we need

Ramaphosa has little room to manoeuvre, it’s true. But without bold leadership at this juncture, SA is on the road to nowhere.

Read Article
Posted on 17 February 2020 by Athol Williams
Climate change action starts with each one of us
Political Economy

Climate change action starts with each one of us

Climate change is a global emergency and citizens must play a bigger role in addressing it.

Read Article
Posted on 16 September 2019 by Catherine Constantinides
Business As Usual Wont Fix Youth
Political Economy

Business as usual won't fix youth unemployment, poverty and inequality

Young people are growing tired of vague targets and empty promises made by successive governments since 1994. Now we need decisive leadership and quick action to drive change.

Read Article
Posted on 13 June 2019 by Athol Williams
Brexit Crisis Offers Key Lessons Media
Political Economy

Brexit crisis offers key lessons and opportunities for Africa

The lessons of Brexit warn us that unless the benefits of economic integration are understood - are experienced - by the average African citizen, Africa’s Continental Free Trade Area initiative is doomed to failure.

Read Article
Posted on 29 May 2019 by John Luiz