Budget needs to align with goals in new leadership’s economic vision
Implementation is now needed as Ramaphosa has started ball rolling on growth, investment and job creation
The party atmosphere at President Cyril Ramaphosa’s first state of the nation address on Friday night was different; so too was the fluent delivery of the speech by a man who so clearly understands and cares about the issues, and received a standing ovation from all parties. On its own all of that will have sent good signals to investors and ratings agencies.
But so too should the content of the speech, which, in its own way, was a crucial piece of economic policy and one that will frame this week’s budget speech. That the economics of the state of the nation address were new and different is not immediately obvious. Amid the euphoria there were the sceptics who carped that there were no details nor much new in the speech other than the various summits, commissions, conferences and committees Ramaphosa plans to put in place.
There’s some truth in that: there were few policy measures that hadn’t already been announced and there was no laundry list of projects and policies of the type that has typified the state of the nation address in recent years.
But that, perhaps, was precisely the point and the first notable aspect of Ramaphosa’s address was the way in which it redefined what the state of the nation address is meant to be. It’s not supposed to be the kind of random list of stuff punctuated by self-congratulatory crowing about achievements along with the odd promise to tackle challenges that the Zuma-era speeches had become. Rather, it needs to put forward a vision of what the president and his government seek to achieve, defining priorities and setting out a framework for work in the year ahead.
Friday night’s address was a vision statement rather than a detailed programme of action, one that emphasised nonracialism and ethical behaviour and decency and integrity. But it also, crucially, emphasised job creation as the way to improve people’s lives. A second notable aspect of the speech was its clear focus on the economy and specifically on the measures required to attract the investment that would lift the growth rate and create jobs, especially for young people.
The list of measures may not have been that different from the addresses of the recent past, but the tone was and there were clear commitments to resolve the impasse in mining and negotiate a new charter, as well as to press ahead with measures initiated by the CEO Initiative, such as the Youth Employment Scheme and small-business fund. As importantly, there was the strong commitment to “turn the tide of corruption in our public institutions” and to rebuild the damaged institutions of state. Messages that will be as important to ratings agencies and investors deterred by state capture as they will be to ordinary citizens.
The hallmark of the speech, however, was Ramaphosa’s trademark social compact approach. This, and the creation of a number of other new committees and commissions, was the third notable aspect. Twenty years after the Mandela-era jobs summit of 1998, he announced a new jobs summit “to align the efforts of every sector and every stakeholder behind the imperative of job creation” and come up with practical solutions to be implemented immediately. He will create a new economic advisory committee to bring together expertise from business, government, the private sector and academia and put together a team to take infrastructure investment forward, as well as putting together an investment conference within three months to market SA’s attractions to investors. A social-sector summit will bring nongovernmental and community-based organisations in to help tackle poverty and inequality, and a digital industrial revolution commission will bring private sector and civil society in to help SA manage those challenges.
It all sounds like a recipe for endless meetings and very little action. Some would argue SA already has the policies in place to drive growth, investment and job creation, we just need implementation. The point is though that those policies haven’t worked, and arguably one reason why they haven’t is that the trade-offs required to make them work haven’t been faced or agreed.
It’s one thing to put job creation at the centre of the agenda. But has SA faced what that means for policy? And have the government, business, labour and other key stakeholders agreed on what compromises they are willing to make to make it happen? Unlocking growth and competitiveness in a sclerotic economy will require deals to be done between the government, business and labour. It will also require more private-sector participation in key sectors such as power or transport or water than the government or labour have tended to be comfortable with.
What Ramaphosa’s chances are of getting the partners together to negotiate solutions speedily are as yet unclear. But with the right leadership, and the right people to implement, his approach at least holds out the possibility of a more dynamic economy in the medium to longer term. And in the short term, the Ramaphosa rally in confidence is expected to boost investment and consumer spending, lifting the growth rate closer to 2% over the next couple of years.
That’s the context in which this week’s budget will be tabled in Parliament, one in which the ability of the Ramaphosa government to accelerate the growth rate to well over 2% will be key to how much pain SA needs to take to get its public finances back on track.
After October’s medium-term disaster, in which the finance minister projected a R209bn revenue shortfall over three years but took no action to correct the damage to deficit and debt paths, markets and ratings agencies are watching to see what corrective action this budget will offer and where the money will be found for extras such as free higher education.
Rating agencies Fitch and S&P Global Ratings already have SA’s ratings in junk territory, with S&P having cut its local currency rating in response to the October budget. Moody’s has the rating on review for a downgrade to junk status and has said it will pronounce after the budget. Before December’s ANC conference it was hard to see how SA could avoid a ratings downgrade. Now, there’s arguably a good chance the downgrade will be averted.
The agencies have flagged three big concerns: weak growth prospects, question marks over SA’s commitment to fiscal consolidation and the risk that guarantees to ailing state-owned enterprises (SOEs) could be called.
On all three items, the Ramaphosa factor and the budget should provide some comfort, even though big risks remain. Growth prospects are now somewhat better, but not yet better enough to allay the ratings agencies’ concerns. But chances are that with Ramaphosa making the right noises about the economy, Moody’s will give SA the benefit of the doubt as it has done before. That could apply to the budget numbers too.
The government fell off the path of fiscal consolidation in October: it breached its selfimposed expenditure ceiling, and, in the absence of corrective tax or spending action, the public debt ratio was forecast to balloon to over 60% and keep going up, instead of stabilising as the government had kept promising it would.
This time round, the Treasury has to contend with the revenue shortfall plus R12.5bn for the first year of free higher education, and while it will prune expenditure sharply and find at least R30bn of tax hikes to fill the fiscal hole, it’s not clear that it can do enough to stabilise the debt over the medium term or enough to satisfy the ratings agency metrics.
However, word is that the government has finally bitten the bullet and will hike the valueadded tax rate for the first time in the democratic era, lifting it from 14% to 15%, giving it up to R20bn extra even after some social spending to compensate the poor. That won’t just bring in much of the money, it will also be a clear signal that the government is committed to fiscal consolidation and willing to do what it takes, as long as it doesn’t damage growth too much.
Add in the new credible boards at South African Airways and Eskom, plus Ramaphosa’s comments on sorting out SOEs and corruption, not to mention his commitment to streamlining government departments, and the action taken could do the trick for ratings agencies and investors, for now, even if the fiscal metrics announced in the budget are still far from ideal.
But there are still big risks to whatever budget framework will be presented on Wednesday. The SOEs are one: new boards are a start but it will take time and pain to put viable business models in place and in the interim there’s no certainty the state won’t be called on for funds.
The bigger and more immediate risk is the public-sector wage round, which is under way. Each percentage point above inflation adds billions to an already constrained spending envelope and if the government cannot persuade its employees to buy into some fiscal prudence, the outcome of the negotiations could derail carefully crafted budget numbers.
SA has a long and hard road to travel before it can restore its public finances to health. And the imperative to do this is not just about ratings agencies or investors — it is about how much of SA’s hard-earned tax money it wants to pay away in the interest costs on an ever-rising public debt, costs that could rise to 15c in every R1 of revenue over the next three years, crowding out spending to improve lives and boost the economy.
But this budget is as much about optics as it is about the numbers. That includes the question of the identity of the finance minister who presents it: that Malusi Gigaba will be replaced is hardly in question, but the question is when and by whom, and that person’s credibility matters a great deal to the market.
“Tough decisions have to be made to close our fiscal gap, stabilise our debt and restore our stateowned enterprises to health,” Ramaphosa said on Friday night. Wednesday will reveal how tough those decisions have been and whether they will start to restore stability and health.
TOUGH DECISIONS HAVE TO BE MADE TO CLOSE OUR FISCAL GAP, STABILISE OUR DEBT AND RESTORE OUR STATE-OWNED ENTERPRISES TO HEALTH