25 February 2016

South Africa: Finance Minister Forced to Walk a Difficult Political Tightrope


The budget presented by South African Finance Minister Pravin Gordhan showed a great balancing act.

The minister gave welcome tax relief, found money for higher education and continued the country's economic stimulus packages. He also announced a targeted reduction in government debt and budget deficits.

The budget didn't commit the government to massive expenditure - that is it wasn't expansionary. But it also didn't take money away from key areas, so wasn't contractionary either.

Pressure from all sides

To fully appreciate the pressures behind the balancing act, one has to bear in mind the various political economic and class interests at play in creating the national budget.

First, the African National Congress has been losing support in national general and local government elections since 2009. This, while it has continued to claim a role as the vanguard in advancing economic transformation to deracialise ownership of the economy.

Pressure to use the national fiscus to achieve this goal, especially through expansionary macroeconomic policy, has always been there. The World Bank has attributed a reduction in extreme poverty in South Africa to its use of macroeconomic instruments including progressive taxation and social grants. The increase in social grants continues to provide a social security net to millions of South Africans, keeping them out of extreme poverty.

Additionally, expansionary fiscal policy was announced as a key strategy to stimulate economic growth when President Jacob Zuma's administration came to power in 2009.

Secondly, on the political front there is Julius Malema's Economic Freedom Fighters. The growth of this self-styled leftist organisation and its sustained attack on the revolutionary commitment of the ANC is a thorn in its flesh.

Thirdly, further pressure comes from the more liberal Democratic Alliance official opposition. The party consistently puts out messages about fiscal discipline and a leaner administration. This, coupled with the reactions of neoliberal markets and the global economy, preclude the ANC from adopting more radical economic transformation.

Fourthly, the influence of business and markets cannot be overestimated. The governing party was reminded of the power of the markets when the economy lost billions of rands after Zuma fired his Finance Minister Nhlanhla Nene.

The ANC's problems are further compounded by its leftist alliance partners, the South African Communist Party and the Congress of South African Trade Unions. They have been critical of the National Development Plan, the ANC's strategy to eliminate poverty and reduce inequality. They are opposed to any policies they deem to favour capital over labour.

Boosting business confidence

Low investor confidence and a strong business community lobby, which Gordhan referred to in his speech, must also have played a critical role.

He plans to reduce the debt ceiling by about R25 billion a year, with the deficit projected to reach 2.4% in 2018/19. This, and curtailing expenditure, point to a return to some level of macroeconomic discipline.

Investment in infrastructure aimed at stimulating the economy is continuing, with over R870 billion planned for the year. These coupled with the sector-specific microeconomic interventions bode well for economic growth in the medium to long term. The R2 billion allocated to the New Development Bank focused on investments in Africa should be welcomed.

Although inclusive economic growth was a key message of the minister's policy statement, he had nothing to show for it in real terms. Radical economic transformation remains unaccommodated beyond rhetoric and sloganeering.

The minister has done well to promise that 23% of the R100 billion allocated to the Industrial Development Corporation (IDC) would finance black industrialists but opportunities to use the public purse for transformation have been missed once again.

Need for leadership

Granted, targets should be set for transformation outcomes for the IDC but government should set transformation targets for itself also. There will be an outcry, especially from some powerful sectors, but it is high time government set transformation targets for its own total expenditure and that of the parastatals.

It has become clear in South Africa that for transformation to work, equality of outcome is as important as equality of opportunity.

Gordhan means well, especially in his attempts to curtail public sector expenditure. But his success requires strong leadership and strategic alignment across the entire public sector.

Disclosure statement: Ongama Mtimka is affiliated with Isidima Development Council. The NPC seeks to advance socio-economic transformation in the Eastern Cape

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