Medium-term budget a lesson in how government needs to do more with less

By Raymond Parsons

WATCHING Finance Minister Nhlanhla Nene struggling to balance his maiden "mini-budget" in Parliament last week was a strong reminder of where the word "budget" originates. In France during the Middle Ages, business people kept their money in a "bougette", or small leather bag.

Budgeting then consisted of counting the money in the bag to see if there was enough to pay expenses. From this simple innovation, the concept of a "budget" developed as we now know it. It epitomises the universal but complex challenge of "balancing budgets" faced by modern ministers of finance and, indeed, by the general public in their daily lives.

The stark realities of budgeting in SA in the light of recent economic and fiscal deterioration were again apparent in the latest medium-term budget policy statement. Though called a "mini-budget", it came with "maxi" challenges for Nene.

Even though the present weak global economic outlook is not helpful to SA, it need not distort our chart of economic progress. Nene rightly reinforced his previous view that the biggest constraints to economic growth in SA were internal, and that these were within the power of South Africans to fix.

This resonates with a simple prescription, which a reputable overseas economic publication recently offered to those economies it described as "weaklings" — "heal thyself, rather than wait for the US to solve your problems. The laggards should treat the latest spate of bad news as a wake-up call."

Was Nene’s message a wake-up call? Many of the right buttons were indeed pressed to promote fiscal consolidation and avoid a "debt trap".

We must recall that the mini-budget in SA embodies the government’s rolling spending plans for the next three years.

But it has assumed increasing importance in assessing economic and fiscal prospects around those spending plans, and on which anticipated tax revenues are based. An expected growth rate of only 1.4% this year reflects the extent to which SA’s growth performance has deteriorated in recent years.

What about future economic growth? The higher job-rich growth SA needs is gradually becoming like the horizon: it recedes as we approach it. A modest 3% growth rate is now expected only by 2017, yet SA needs stronger growth sooner rather than later just to create extra fiscal "space".

The tax options are limited. Though any tax changes were left for the main budget in February, the R15bn question is which taxes can be safely raised in the present economic environment if the government is looking for a bigger share of a shrinking cake?

There is the real danger of SA drifting into the discredited "tax and spend" cycle, which was the bane of many economies a few years ago. As Nene’s frank economic assessment confirmed, many red flags are up. The declining growth rate has badly dented tax revenues, government spending as a whole is proving difficult to control, public sector wage negotiations have become a high-risk exercise, and deficit financing has to be prevented from escalating beyond safe limits.

"Doing more with less" is a binding mantra in these circumstances. The mini-budget was an exercise in fiscal discipline, rather than one of austerity. It seems to have done enough to hold the international credit rating agencies at bay for the time being.

But has sufficient been done to turn the economy around in the medium term?

Business and investor confidence are not at positive levels. Most business people would welcome the National Treasury’s plans for better control over the government’s chequebook. Yet the private sector would also want a realignment of fiscal policy in ways that are supportive of economic growth.

Nene correctly emphasised "productive public investment" rather than current consumption, but this needs a more vigorous balance. In 12 months’ time, the National Treasury’s credibility will be on the line if the Cabinet does not throw its full weight behind the commitments made in the mini-budget.

The financing of infrastructure, including Eskom and other parastatals, featured strongly in the mini-budget and the new overall approach to state-owned enterprises funding crises is positive. Eskom is but one of the key parastatals that has recently thrown itself at the mercy of its only shareholder, the government and, ultimately of course, on the taxpayer. Given the burden that Eskom is placing upon the broad debt of the government, it is a pity that these substantial commitments are not supported by a more definitive energy policy.

Generally, there must be more tangible moves towards public-private sector partnerships to leverage private-sector balance sheets. SA’s growth prospects now need bolder action and the necessary political support must be mobilised for it.

It is precisely when fiscal and monetary policies begin to tighten that the emphasis must shift to tackling structural and regulatory issues to create a more investor-friendly environment.

We need to think more long term; economic recovery and reform have to be dealt with in tandem. Above all, there must be consistent and visible evidence that the National Development Plan (NDP) is being steadily implemented and that policies are being made compliant with it.

Nene referred to a "deficit of execution" in the NDP. This, of course, lies beyond the National Treasury alone. Budgets are ultimately just a financial expression of the political economy of a country, but the message is clear.

Though some progress has been made with delivery mechanisms such as Operation Phakisa and the government’s five-year implementation plan, there is still too much scepticism about the NDP.

Perhaps the relative brevity of Nene’s speech last week was intended to suggest: "We’ve said all this too many times before; now let’s get on with it!"

If SA is to promote investment-led growth and job creation, it becomes essential that business and the government work much closer together. The private sector is where the jobs must be created. The gap between what the government wants, and what business needs, to make a success of the NDP, requires to be steadily closed.

The NDP will succeed only if it is seen to be a truly collaborative effort, and in that process confidence and trust are built among the key players at a time when they are at a low ebb.

Eventually, all roads lead through the economic growth projections. Whatever the key economic variables, such as investment, deficits, tax revenues, exports or unemployment, these ratios will change for better or worse depending on the future growth rates being realised. Economic growth is not "a cure for all diseases, an end to all distress", but it makes other aims easier to achieve and softens conflict among them. That is why the NDP wants an eventual average annual growth rate of about 5.4% by 2030, on the back of which to build a bigger, stronger and better economy. But there remain some tough choices to be made by the government and major stakeholders alike if SA’s economy is to be successfully turned around in the next couple of years and avoid falling into a "low-growth trap".

First featured in Business Day on 27 October 2014.