POLITICS

Filling SA's fiscal black hole

George Palmer writes that Pravin Gordhan can't avoid deep spending cuts

As with most things in life, if you want to know what's really going on, follow the money. In the case of South Africa's ANC government, much of the revenue the Treasury was expecting to haul in this fiscal year won't materialise. That leaves Pravin Gordhan, the new finance minister, staring into a deep hole wondering how best to fill it.

How come? The ongoing global recession is eroding the tax payments needed to finance the unrealistic election commitments the ANC made to voters. There's just not enough in the kitty to generate the 500,000 new jobs Zuma promised, build and refurbish a creaking infrastructure, support the growing army of unemployed, heal South Africa's dangerously depleted health services, bolster social welfare, reform a lagging education system, accelerate rural development, fight crime, eliminate corruption and so on. And so on.

As for the ANC's promise of a National Health Service, forget it.

All this and more was spelled out by Gordhan in the Medium Term Budget Policy Statement for 2009-20013 presented to MPs on October 27 (see here). So Gordhan acknowledges there's an urgent need to make big cuts in government spending next year and beyond by focusing on priorities and slashing waste and corruption in a bid to contain anticipated fiscal deficits.

As a result Zuma's horde of ministers and hangers-on are going to get a lot less in 2010/11 with which to run their departments. That is only going to intensify the back-stabbing and turf battles among power-hungry politicians who'll now be scrambling for crumbs from Zuma's table.

Assuming Gordhan's case for mercilessly slashing spending has already been OK'd by Zuma (and by economic planning chief Manuel), who among Alliance "deployees" to Parliament will give it unequivocal support? Who will damn it with faint praise? And who will have the balls to reject his austere fiscal strategy outright? Ditto in the big Budget debate next February? Watch this space.

But first let's do the numbers:

In 2004-2007 South Africa's economy grew like gangbusters - at an average annual rate of over 5%, well above target. In 2008 gross fixed capital formation topped 22% of GDP, close to the economy's full potential and up from an average 15% in 1994-2003. But by end- 2007 warning lights were flashing, only to be ignored. Now the global recession has not only slowed South Africa's GDP growth to minus 1.9%, it is taking a big bite out of tax receipts that could well continue for another two or three years:

  • Unemployment has risen sharply: compared to Q3 2008 the formal sector lost 283,000 jobs in Q3 2009 and the number of economically inactive increased by over a million. In the US unemployment is over 10% and going higher
  • By August South Africa's large manufacturers were operating at only 77% of capacity compared with 85% a year earlier and with sales and profits down companies are expected to pay R21 billion less in tax in 2009/10
  • Hard-pressed consumers are spending less so VAT receipts are likely to be R31 billion lower
  • Customs & Excise will collect R9 billion less because imports are down

Overall Treasury expects tax revenues for 2009/10 will only reach R658 billion or R70 billion less than the R728 billion optimistically projected as recently as last February and R34 billion less than the previous year. Brushing aside the certainty of a revenue shortfall Zuma & Co. decided to let spending rip. Gordhan expects by fiscal year-end it will climb to R841 billion, an incredible 35% jump from last year's R715 billion.

Contributing to this year's huge expenditure over-run are: R1 billion for rescuing a shambolic Land Bank; R200 million for restructuring the finances of a mismanaged SABC; R192 million claimed by Airbus against Denel Saab Aerostructures; and, R144 million to offset Gautrain cost increases.

Gordhan also has to ask MPs to vote on adjustments to spending allocations due to "realignments of responsibilities" between departments including R562 million needed for Zuma's "new government structures" and R250 million for rural development.

Other adjustments to 2009/10 appropriations total R16.4 billion including

  • R12 billion in "higher than expected salary increases for public servants"
  • R1.5 billion of "roll-overs" in unspent money for infrastructure and building
  • R1.5 billion saving by the Department of Defence
  • R1 billion for the Land Bank
  • R900 million for treating HIV/AIDS
  • R509 million to cover higher electricity costs for poor families

All that comes to total spending in the current fiscal year of R841 billion (35% of GDP) up from R715 billion in 2008/09 or R127 billion more than envisaged by Trevor Manuel in his February budget estimate. So instead of the small fiscal surplus he anticipated just a year ago and the modest deficit he forecast last February there will be a whopping fiscal deficit in 2009/10 of R184 billion or 7.4% of GDP.

But that's not all. South Africa's total borrowing requirement comes in at R285 billion, or nearly 12% of GDP, when the needs of Eskom, municipalities and state enterprises are added.

Assuming Zuma won't dare to increase the tax burden on an increasingly impoverished nation his government has no choice but to borrow heavily in the financial markets. Plus meet future interest on the public debt, up from R54 billion last March to a projected R100 billion plus in 2012/13 equivalent to 41% of GDP. No wonder Mathews Phosa, the ANC's Treasurer-General, scurried to London last week to cosy up to anxious business leaders and potential investors.

They won't be reassured by the infighting at the top of Eskom's management, the breathtaking electricity tariff increases proposed and their inflationary impact on the South African economy's cost structure.

Despite 2009/10's large total borrowing requirement, it is still manageable provided ANC leaders have the political will to force through deep spending cuts in 2010/11 and beyond. But if not, and year after year Finance Ministers have to go cap in hand to the financial markets to beg for money to pay creditors, taxpayers could face a spiralling interest burden as investors demand higher risk-adjusted yields and the country's sovereign debt rating is downgraded.

Looking ahead Gordhan believes South Africa's economy will be in recovery and growing at 1.5% in 2010, 2.7% in 2011 and 3.2% in 2012. He projects tax receipts will reach R800 billion by 2012/13, up R211 billion from this year's R589 billion. Even so he expects interest on the public debt to come in at over R100 billion in 2013. So he simply has to insist that the ANC keeps a much tighter rein on public sector spending.

Nevertheless his Medium Term Framework 2010/11-2012/13 envisages spending R78 billion more over the next three years than in 2010/11 of which R40 billion will go to the provinces on higher wages, education, health and housing. Municipalities will get over R12 billion for infrastructure, and to help poor households cover rising electricity and water costs.

Meanwhile he will be pressing for a campaign to reduce government waste. He says departments have already identified savings of R14.5 billion over the next three years. He also wants to see an end to "redundant, ineffective and over-priced activities in provincial departments" so they can help finance core education, health and infrastructure. Ditto an end to spending on "unnecessary travel and entertainment, unfocussed consultancy contracts (vide SABC), procurement of supplies at uncompetitive prices, and the elimination of layers of paperwork".

Don't hold your breath.

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