Finance Minister Pravin Gordhan's 2012-13 budget is the first that President Jacob Zuma can accurately call his own.
Even last year's was substantially dictated by external factors - specifically the global economic doldrums and the consequent need to keep the economy afloat and to provide a reasonable safety net for the poor and unemployed in in the anti-climactic aftermath of the Soccer World Cup construction boom.
Gordhan's budget - South Africa's first to exceed R1-trillion - is thus the first comprehensive budgetary and fiscal articulation of the policy package set out by the ruling African National Congress (ANC) at its 2007 Polokwane conference. That policy framework accompanied Zuma on his subsequent journey to the country's highest office.
Significantly, the budget's long-term planning also locks future, post-Zuma, ANC administrations into the economic trajectory first articulated at Polokwane - particularly into the infrastructure-driven approach to growth and job-creation rooted in the New Growth Path and National Development Plan.
Much of Gordhan's speech reinforced and put flesh to the bones of Zuma's dramatic state of the nation address (Sona) on 9 February 2012 declaration that infrastructure spending will be the defining feature of the second half of his presidency (see The next really big thing, 10 February 2012).
Gordhan's budget review lists 43 major infrastructure projects with a combined cost of R3,2-trillion. For the next three years, approved and budgeted infrastructure plans amount to R845-billion: R300-billion is in the energy sector and R262-billion in transport and logistics projects.
The key gap is that Gordhan projects that even with 850 000 new jobs in the next three years, mainly in the private sector, unemployment will remain about 20%. This was not unexpected, even with the ambitious infrastructure drive: a hallmark of post-Mbeki era economics has been the recognition that it is a long, unavoidably slow, walk to an acceptable employment rate. The infrastructure drive makes a dent, but in practice does no more than lay the foundation for high and sustainable employment levels.
Gordhan has also recognised that ambitions to nurture economic growth through government spending will become just another good idea unless the administration can protect its massive infrastructure and developmental investments from incompetence and corruption. He has recognised the key obstacles to a real return on investment are disorganisation in public procurement systems and the absence of a rigorous and competent system of procurement oversight. He therefore announced further National Treasury initiatives to strengthen financial management, oversee procurement at all levels, and more concretely, to lock tenderpreneurs out of the procurement processes - particularly on major infrastructure projects.
Building on his initiatives last year (Vol 29 No 17), Gordhan announced that National Treasury will appoint a national procurement officer with responsibility for all public sector procurement; a programme to vet all procurement officers and review competencies to perform the procurement function; integrate procurement; and strengthen the national procurement architecture.
Zuma's decision to beef up the Presidential Infrastructure Coordinating Commission (Picc) is part of this cost-efficiency/effectiveness drive. Gordhan acknowledges that in 2011 state-owned enterprises (SOEs) failed to spend nearly a third of their allocations - R82-billion of the planned R260-billion.
Jobs
Gordhan's allocated R4,8-billion to the low-skill "work opportunity" Expanded Public Works Programme (EPWP) initiative - taking the EPWP total since 2004 to R77,8-billion. The R1-billion allocated by Pretoria's jobs fund - a R9-billion initiative established last year - has committed just R1-billion since its launch to high- and mid-skilled jobs. The fund allocates funds through a competitive bidding process. A second bidding round is due soon.
Gordhan notes that 85-million manufacturing jobs are going to be displaced from China in the next few years, partly due to rising wages but also as Beijing's economy moves up the value chain. South Africa is not using its policy framework to position itself to take up the resulting slack, for example in the textiles sector. But are other SADC economies are ready and willing to do so.
Beyond infrastructure rollout, the strongest economic stimulus spending tabled by Gordhan is the R5,8-billion allocated to Trade and Industry Minister Rob Davies to enhance competitiveness, and R2,3-billion for special economic zones (SEZs). While there is some debate over the returns accruing from generous benefits - tax holidays, subsidised power and so on - to make SEZs sufficiently attractive (the availability of power is, thankfully, being addressed with the R300-billion allocation), the Mbeki-era idea of moderated labour laws is unlikely to be seriously discussed. Gordhan still carries the scars of his attempt to float the idea of greater flexibility. The idea is, at best, a short-term one to entice in investors. Inherent to Zumanomics theory is the need to up-skill nationally to provide a labour pool for a dynamic and sustainable economy. Skills come at a price.
While the skilling process is underway (courtesy, this year, of the R31,3-billion and R152-billion allocations respectively to Blade Nzimande's Higher Education and Training and Angie Motshekga's Basic Education), Gordhan has tightened the social safety net.
Social grants & NHI
The social grant allocation has now reached R105-billion and is set to rise to R122-billion in three years, by then spent on 16,8-million beneficiaries. The rapid rise of recent years will begin to plateau: the child grant has been available progressively each year for children a year older, but stops when they reach 18.
The figure is undeniably large - and the beneficiary base, fully a third of all South Africans, even more so. But it accounts for a more modest 10% of consolidated spending and is perhaps unavoidable until the economy creates and maintains sufficient jobs. Gordhan acknowledged this: "Government has expanded social assistance to households over the past decade, but employment and economic growth have to be the main future drivers of income growth and poverty reduction".
The national health insurance (NHI) system has finally taken shape in the form of a R1-billion allocation for the 10 pilot sites. The initiative recognises its success is dependent on a vibrant public health system - thus the R403-million for a long-overdue upgrade of nursing colleges and R426-million for training hospital revamps. But the NHI faces two crucial tests. The first is for government to show the fruits of its previous hospital revamp programme. It was unveiled by the late Health Minister Manto Tshabalala-Msimang in 2009 and was set to cost R8,2-billion. The success of that programme will go a long way to determining the state of readiness for the NHI.
The bigger challenge is the funding crunch that the NHI faces in 2014-2015, a single year in which Gordhan estimates it will require R6-billion. The as-yet unanswered question is how much might be required in each of the subsequent 12 years to full roll-out.
Financing
The markets will approve the budget deficit and public service borrowing requirements (PSBR). The deficit came in lower than expected at 4,6% of GDP, largely due to revenue overrun of R10-billion and under-spending by departments. The deficit is set to moderate to 3% by 2014-2015. Debt levels are set to stabilise at 38% of GDP. The PSBR is static at 7,1% of GDP, the same as last year, but will moderate to 5%, before spiking up due to infrastructure spending acceleration.
The PSBR had raised concerns that it can be used to simply finance a ballooning public sector wage bill, which shot past R300-billion in last year's budget. Parliament also raised concern over the need to contain the wage bill at below 40% of consolidated expenditure. In this budget Gordhan notes that the bill had increased because of relatively generous settlements in recent years and occupation specific dispensations, but also because the government had been hiring. It has been the only consistent job creator through the recession. But this is due to change.
Small business
Gordhan's 2012-13 budget is a reminder that South Africa is a rough neighbourhood for small business. The stimulus measures in the budget are a logical continuation of steps taken in recent years to reduce red tape or simplify tax. But they pale into insignificance when compared to other economic stimulus measures. The budget retains several of the characteristics of an economy originally built on mining and heavy industry, which then produced banks with a mandate to preserve the mining company's cash. It evolved under apartheid and the economic isolation it spawned to be dominated by conglomerates and entities like Sasol. It is now undergoing a new phase of industrialisation. A venture-capitalist mind-set is not in its genes and it remains a tough environment for small and micro enterprises.
Small businesses now have to hang around for one last bit of institutional tinkering as small businesses funding bodies such as Khula, Samaf, and the National Empowerment Fund are re-housed under the Industrial Development Corporation (IDC) - an entity established and still focused on mega-projects.
Small business owners may wonder what has happened to Khula Direct, the model approved by the Cabinet in late 2009, allowing Khula to migrate from guaranteeing bank loans to lending directly to small businesses. Khula then developed the plan and attached estimates that showed implementation would cost R1,6-billion over three years. Will it be carried forward in the newly absorbed entity? Will it be reviewed or scrapped?
In this budget, small businesses benefit from a slightly higher tax-free threshold as well as lower tax for income below R350 000. The long mooted streamlining of turnover, employee tax and VAT for small businesses that make less than R1-million a year turnover finally kicks in.
Gordhan has continued on the path he helped shape as South African Revenue Services commissioner and one he inherited from Trevor Manuel, charting a steady course through the choppy waters of the global economic environment.
His budget is, however, the most explicit fiscal articulation yet of the policy package agreed at the 2007 ANC Polokwane conference that set Zuma on his path to the presidency.
Toll tinkering
Gordhan's budgetary attempt to defuse the rumbling dispute over the introduction of tolls on Gauteng's freeway system was directed as much at placating the bond markets as at assisting the provincial government to extract itself from a political gridlock.
Pretoria has already had to intervene in the Gauteng debacle, delaying implementation of the ill-conceived R20-billion, user-pays (and in the original plan, pays a great deal) project to upgrade the freeway system around South Africa's economic hub. Public resistance to the opening of toll gantries has been intense - particularly with the ruling party's trade union ally, Cosatu, taking the lead.
Gordhan's special allocation of R5,8-billion to reduce the R20-billion debt from the upgrades consciously sends a message to the bond markets that, whatever the political turbulence, the debt will be repaid.
With a third of South Africa's 9,4-million motorists registered in Gauteng, the use of national funds to contribute to the solution is not unreasonable.
Gordhan made a gesture towards toll-road critics, capping the per-km toll at 37c and overall monthly toll fees at R550 - significantly down from the R2 000 level originally projected. The next two months will tell if his interventions are the government's last word on the issue.
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