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Gigaba Faces First Major Test With Inaugural Medium-Term Budget

Apart from the controversial circumstances of his surprise appointment, the finance minister faces stern economic tests in formulating his budget.

06/10/2017 03:59 SAST | Updated 06/10/2017 03:59 SAST
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South African Finance Minister Malusi Gigaba during a Bloomberg Television interview in London, United Kingdom, in June 2017.

ANALYSIS

The Medium Term Budget Policy Statement on October 25 is widely seen as a watershed moment for recently promoted Finance Minister Malusi Gigaba, who has now been in office for six months. Apart from the controversial circumstances of his surprise appointment earlier this year, Gigaba faces stern economic tests in formulating his first budget.

Not only is he having to address the fiscal consequences of a weak economy, but his performance at the national treasury as the traditional custodian of South Africa's public finances will also be set against the solid track record of his esteemed predecessors.

Fiscal policy in SA has for many years been certain and predictable, and the treasury has enjoyed a high international reputation for transparency and credibility. Along with the South African Reserve Bank, the treasury has been widely seen as an institutional bastion of probity in SA.

In terms of perception management, Gigaba must leave no doubt in his budget speech as to where he stands on issues such as state capture and corruption if he is to enjoy credibility. There must be no ambiguity. This is his Rubicon in more ways than one.

At the economic level, it is already clear from available data that Gigaba faces a fiscal gap of about R50 billion at a time when his options for closing it, with minimal pain, are limited. He needs to manage the fiscal shortfall in ways that create confidence and credibility in his economic steersmanship at a critical time for the SA economy.

There is a significant "trust deficit" to be overcome, arising from some of his statements and decisions over the past few months. The budget comes at a time when there are highly negative perceptions around the financing of state-owned enterprises (SOEs) such as SAA and Eskom, as well as reports of divided counsel in the treasury.

Mike Theiler/ Reuters
Bank of Japan Governor Haruhiko Kuroda chats with an aide as South Africa's Finance Minister Malusi Gigaba waits for the start of the International Monetary and Financial Committee (IMFC) Meeting, as part of the IMF and World Bank's 2017 Annual Spring Meetings, in Washington, U.S., April 22, 2017. REUTERS/Mike Theiler

The challenge for Gigaba is to win the confidence of key stakeholders, ranging from business and labour to the credit rating agencies, and assure them that the treasury remains in a safe pair of hands. The finance minister himself has hinted that a failure to effectively turn the situation around may require SA to seek assistance from the International Monetary Fund (IMF). But we must remain careful what we wish for as IMF help does not usually come without heavy strings attached.

So the challenges are clear. How might the "solutions" unfold? While a fiscal shortfall of about R50 billion is not necessarily unmanageable, there is obviously a longer-term power play. It is not just a numbers game.

The perception that the balance of power in decision-making over national spending priorities is shifting from the treasury to the presidency raises questions about whether the treasury will retain effective control over the nation's chequebook.

The economic and political environment in which Gigaba is operating may, therefore, be distinctly unfavourable to the kind of inevitable trade-offs that are required to correct the situation. That said, closing the deficit will nonetheless in reality still need to be addressed in two phases. Firstly, what Gigaba can do immediately in the medium-term budget this month is reprioritise government spending and minimise additional borrowing. And, secondly, what is left outstanding can be covered by higher taxation in the main budget in February next year.

In the wider context, his upcoming budget speech will need to report on progress made with his 14-point programme announced in July 2017 to stabilise and boost the economy. It will also be necessary to show how the overall 2017 medium-term budget message is aligned to the longer-term goals of the National Development Plan.

The fact remains that the current economic prognosis is not good or helpful.The economy is in a "low growth trap", with a likely growth rate of about 0.6 percent in 2017, rising to about 1.2 percent next year. This means that per capita income will continue to decline. And tax revenues have consequently fallen.

What Gigaba is thus facing is that, unless state spending can be further reduced, or borrowing increased, solutions will have to be sought in higher taxes, new taxes or more efficient tax collection.

The economic assumptions on which the 2017-18 budget was based in February now need to be revised to accommodate new economic and political realities. Only if SA broadly aligns its state expenditure to the size of its gross domestic product, and to the rate at which it grows, can it avoid a "debt trap".

But although the medium-term budget deals with important government spending plans and how they might be financed, it is not a tax-changing event. As indicated, tax decisions are taken later in the main budget. But, in passing, it should not escape the treasury's notice that taxes were raised by Pravin Gordhan in the February 2017 budget but do not seem to have been helpful to either the economy or the fiscus.

That said, it is likely that, whatever fiscal remedies may be embodied in the medium-term budget, there will still be tax changes needed in the 2018-19 budget later. The upcoming budget is, therefore, a major curtain raiser to the main fiscal game in February next year, when the whole picture comes together.

Whatever fiscal plans emerge in the coming budget, there is the real prospect that individuals and business will face substantial uncertainty from a host of potential tax decisions, some of it emanating from the ongoing work of the Davis Committee on tax reform.

What Gigaba is thus facing is that, unless state spending can be further reduced, or borrowing increased, solutions will have to be sought in higher taxes, new taxes or more efficient tax collection. Several economists and other experts have warned that the government's taxing and spending policies are now unsustainable in the face of persistently weak growth.

The risk of SA drifting into a chronic and negative "tax-and-spend" cycle, which global experience shows is economically damaging, is quite high. And SA has a chronically small tax base.

If Gigaba needs additional expertise to help him make the right decisions, he does not have to look far. Apart from the economists in the treasury itself, there is expertise available from the Reserve Bank, the National Planning Commission, the Parliamentary Budget Office, the private sector and academia. The unusual challenges facing the finance minister in this budget should encourage him to reach out to a cross-section of experts to give input.

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JOHANNESBURG, SOUTH AFRICA AUGUST 17, 2017: (SOUTH AFRICA OUT) Minister of Finances Malusi Gigaba and President Jacob Zuma on August 17, 2017 in Johannesburg, South Africa. The opening of the Africa Regional Centre for the New Development Bank is held in Sandon. (Photo by Gallo Images / Beeld / Wikus de Wet)

Practically, this might take the form of holding a one-day think-tank session at which a selected but diverse group of economists be invited to brainstorm ideas about possible solutions, outside the normal structures. If it is too late to arrange this before the upcoming budget, then second prize would be to organise it well before the main budget, when tax options would be relevant and SA will also know what the credit rating agencies have decided about the country's investment gradings towards the end of the year.

There is nothing to lose from such an initiative, but much to gain. And in terms of "real politick", we should also not forget that, by the time of the February budget, SA will be a year closer to the next general election in 2019.

In summary, in framing the pending medium-term budget, Gigaba is besieged by both fiscal and credibility challenges. The current headwinds facing the economy alone make the task of this budget formidable. But these difficulties are driven mainly by domestic political and economic factors, at a time when the global economy is supportive of the SA economy. We cannot blame the world economy but must make the right public policy choices and find the answers here.

Then there are the credibility issues arising out of the perceived role of the presidency in fiscal decisions and the allegations of a parallel structure being developed within the treasury. All we have at the moment are some facts, some fears and some suspicions as to the real position. Yet these all bear heavily on his efficacy.

In the final analysis, Gigaba will need to clearly demonstrate in his medium-term budget speech that he has finally shed old ideological and personal baggage, and has unequivocally embraced fiscal probity in ways that will boost confidence in the way ahead for the SA economy.

Professor Raymond Parsons, NWU School of Business and Governance.