Economic Watch

Multiple deficits threaten Nene’s plans

Heinrich Kruger
Heinrich Kruger.jpeg

What can almost be called a constellation of deficits on multiple fronts threatens the good intentions – which are by and large solid – of Minister of Finance Nhlanhla Nene’s medium term budget policy statement (MTBPS).

While the budget deficit is expected to widen to 4.1% of Gross Domestic Product (GDP) in 2014/15 (and in the words of the Treasury the “budget deficit is high, debt levels have approached the limits of sustainability”) that is not the only and probably not the most serious threat to economic and social stability in the country.

The Treasury also has it right when it states that – without adjustment – it is likely that the country’s sovereign debt risks being downgraded to “sub-investment grade” which could impair access to credit markets.

In his MTBPS in parliament last week the minister did indeed announce some intentions to address these concerns via:

• more efficient spending
• savings on government expenditure
• increased tax revenue
• the selling of “non-strategic” state assets and
• keener oversight of state enterprises like Eskom and South African Airways.

Enter another deficit: credibility. Nothing could have illustrated the ‘credibility shortfall’ better than the disclosure that Eskom (responsible for the deficit in the country’s energy needs) is sponsoring the ‘politically well-connected’) New Age newspaper to the tune of R43 million. This comes in the very same week that the MTBPS is delivered.

This money goes towards the cost involved in organising one ‘breakfast briefing’ per month for three years. The deal reportedly overshoots the power utility’s sponsorship budget.

Moreover, there is also doubt whether the minister can make his declared intention to curb salary increases for government employees stick. Judged against recent history, and in light of the governing alliance between the ANC and trade unions, this does not seem likely.

Government employees, representing a massive 20% of the total workforce, are currently in the midst of wage negotiations. They are demanding a 15% annual increase. The prospect of widespread strikes in the public sector during the months ahead looms large.

It should be kept in mind that it was the almost six-months-long strike in the platinum sector that was largely responsible for scrambling the budget figures of Mr Nene’s predecessor, Minister Pravin Gordhan.

Labour deficits

It’s been some time now that the South African labour relations dispensation has been falling far short of providing a stable labour environment. Almost the only certainty is that there will be disruption, which more often than not, turns violent.

South Africa must one of the very few countries in the world that has a so-called ‘strike season’ for a substantial part of the year on its calendar.

At the same time the country has one of the highest ‘employment deficits’ in the world with an unemployment rate in the order of 25%. Of the 8.3 million unemployed, 4.4 million are young people between the ages of 15 and 34. This makes for a youth unemployment rate in the order of 52% and has serious implications for social stability.

To this can be added, as has been acknowledged in the MTBPS, that the country has a serious skills deficit. It points to an education and training sector that has been falling short in servicing the needs of our emerging economy.

Against this background Adcorp recently reported that since 1967 labour productivity has declined by 32.5% and fallen a massive 41.2% from a peak in 1993.

Income deficit

In his budget introduced in February of this year Minister Gordan budgeted for 2014/15 tax collection of R999 billion. This has now been revised down by R10 billion in the face of weaker than anticipated economic growth and makes for an uncomfortable budget deficit of 4.1% of GDP.

Minister Nene has been short on details, but declared his intentions to “reform” tax collection to increase the state’s tax revenues by at least R12 billion in the next budget year, R15 billion in the 2016/17 tax year and R17 billion in following year going into 2018.

It is difficult to imagine how he will achieve these targets in the face of some serious structural constraints in the South African tax system. Only 10% of the population pay tax while 30% are fully sustained via state grants. Of those paying tax, about a third are government employees.

There does not seem any way out of this conundrum, other than a dramatic and sustained improvement in the economic growth rate. At its present 1.4% it barely reaches break-even. At the same time an array of policy and legislative proposals, a growing army of the unemployed, and increasing social unrest is scaring off fixed – especially foreign – investment.

Expectation deficit

Probably the most threatening factor to stable development in South Africa is the growing deficit between the expectations of a very large percentage of the population and their lived reality.

According to a report released by Stats South Africa in April this year the percentage of South Africans living below a poverty line of R620 a month per person declined from 57% in 2006 to 46% in 2011. However, the fact remains that a massive 23 million South Africans still live in abject poverty.

Increasing numbers of people, especially our expanding cities, are expecting more than the bare minimum needed for survival. Impatience is growing as is illustrated by the growing wave of protest actions.

Unfortunately the blueprint for the country’s development, the National Development Plan (NDP), has largely been turned into a vote-seeking political platform, creating a ‘quick fix’ expectation.

In the process, often expensive social elements of the plan have been implemented, while the NDP has been formulated on the assumption that growth rates of 5% per year can be achieved. That is just not happening and is unlikely to happen in the near future.

The NDP is also dependent on some fundamental structural changes in the national household. Some of those, even if everything goes fully according to plan, just don’t happen overnight. For one, educational reforms delivering an appropriately skilled work force could take a generation.

The time has come to truly go back to basics, economically and in building social accord on a broad front.

The powder keg of social discontent might be much closer to exploding than is generally realised.

Thoughts about the possibility of our greatest deficit being one of leadership, I’ll rather keep to myself.

                                                                                                                                                                by Heinrich Kruger

(Heinrich Kruger is International Markets Analyst, CEO & CIO of Kruger International Wealth & Asset Management)

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