‘Gordhan did sterling job’

Johannesburg - Policy-making is a choice between short-term promises and long-term planning. Opportunistic politicians choose the line that goes down best with the electorate. But those who expect to be around to face the consequences of squandering an economy’s resources take the responsible route.

An important theme of the country’s last few Budgets: against a difficult economic backdrop, Finance Minister Pravin Gordhan has been determined to squeeze more bang out of his tax bucks. This is a theme both the payers of the tax bucks and the potential beneficiaries can identify with, whatever their political affiliations.

And politicians, who have to face the fallout in the shape of service delivery protests and voter boycotts, also see the merit of more efficient governance. The only people to disagree with Gordhan’s approach would be those responsible for diluting the benefits to the poor and the economy through irresponsible management and poor financial planning.

At a presentation last week, co-hosted by Business Report, political analyst Steven Friedman said an important message from the Budget was that the government wanted to work with business. This is inherent in the National Development Plan (NDP), a broad blueprint for developing the economy on a sustainable basis, which was highlighted in the Budget.

As Gordhan pointed out in his speech, for the NDP to succeed, government, business, labour and civil society had to work together.

It is a myth that for, policies to be pro-poor, they have to be anti-business. The best interests of the poor and business are identical in the long run: a strong economy means more jobs and greater opportunities. If business behaves badly there are laws that can be brought into play: witness the penalties imposed on the companies responsible for collusion.

But to penalise business as a whole on a point of principle is to destroy the engine of the economy.

Last week’s Budget is an attempt to address the needs of the country as a whole. While critics carp because it was not “bold” enough, realists concede the minister had little scope for anything other than a delicate balancing act.

Azar Jammine, the chief economist at Econometrix, pointed out the “huge constraints” on the government.

At the same conference, he said: “In that context the minister did a sterling job, keeping the show on the road while maintaining fiscal stability.”

Gordhan, unlike his predecessors, has had to contend with the aftermath of the 2008/09 global recession. No growth, slow growth, easy money in advanced economies followed by a policy reversal have destabilised currency markets and damaged the economies of many emerging markets.

After growing less than 2 percent last year, South Africa’s growth prospects are worse than they were a year ago. The forecast for this year is only 2.7 percent. At this level, revenue flows are restricted.

While the minister’s speech was overtly electioneering ahead of the polls in May, outlining the achievements of the ruling party, Jammine said the numbers were not. Gordhan delivered a smaller-than-expected budget deficit for the 2013/14 Budget – 4 percent of gross domestic product (GDP) instead of the 4.2 percent projected at the time of his medium-term budget policy statement. And he said the deficit would return below the benchmark 3 percent within the three-year rolling framework.

When the deficit – the gap between revenue and spending – remains above 3 percent for a period, the cost of debt drains the country’s resources and the economy’s capacity to grow and create jobs. It also creates risks for global lenders.

Jammine noted: “The government is operating in a global environment and the minister has to look over his shoulder at the rating agencies.”

Moody’s Investors Service, Standard & Poor’s (S&P) and Fitch have all cut the country’s sovereign rating by one notch, increasing the county’s interest bill. Moody’s and S&P have a negative outlook on their rating, which means a good chance of a further cut.

On Wednesday, Gordhan warned that debt costs would be higher due to the weakening rand and rising global interest rates. And he said the higher borrowing requirement, to fund the deficit, together with inflation and rand depreciation, would boost net government loan debt from R1.4 trillion in the current fiscal year to R2 trillion by 2016/17.

The absolute figures mean little. More important is the ratio of debt to GDP – because GDP determines the country’s capacity to repay the debt. The ratio, which has already climbed to 39.7 percent from 29.8 percent in 2010/11, will rise to 44.3 percent by 2016/17. This steep increase in the ratio is a stark warning.

With little money to spare and big demands on the fiscus, Gordhan has shifted the focus of spending from day-to-day outlays to long-term investment in infrastructure that expands the economy’s capacity to produce.

This shift in spending plans feeds into the NDP, which has been endorsed by the ANC leadership, but not fully accepted by many within it and openly opposed by many in the trade union movement.

The political contest that lies ahead is not between the ANC and other parties at the May election. It will emerge after the election and will be between those within the ANC who believe in short-term fixes and those who prefer sustainable long-term solutions.

Business Report