When Minister of Finance, Pravin Gordhan, delivered his Budget Speech in parliament on 24 February he was forced into a tight corner. Not only after being in office for some ten weeks he had the unenviable task of having to present a tough budget in an election year.
His budget had to deal with the economic crisis and the risk of a sovereign ratings downgrade while not antagonising the voters ahead of the local government elections scheduled for later this year.
To make matters worse four days before the Minister delivered the Budget Speech, a note containing 27 questions from the Hawks was sent to the Minister in an attempt to establish his ‘culpability’ in the establishment of the so called ‘rogue unit’ during his tenure at SARS.
The Hawks claimed that they were giving Gordhan ample time (4 days) – until Wednesday (budget day) – to answer the questions and to consult with his legal team.
City Press reported that the Hawks claimed to have a strong case against Gordhan and other former SARS officials, and it is ready to submit a docket to the office of the national director of public prosecutions.
Unsurprisingly ANC Secretary General Gwede Mantashe said that the ANC was “extremely concerned” that only four days before the Minister delivered the Budget Speech, questions from the Hawks were sent to him.
“The timing of these questions indicates clearly that there was intention to distract the Minister during this important time. It is even more disconcerting that these questions were leaked to the media. In our view this is a well calculated destabilization plan with all the elements of disinformation, falsehoods and exaggerated facts,” Mantashe said.
Matters were compounded on the Monday, two days before the budget, when President Zuma told the Presidential Press Corp that “Des van Rooyen is my comrade, MK for that matter, he’s a trained finance and economic comrade and more qualified than any minister I have ever appointed in the finance issue.”
Considering all these impediments Minister Gordhan, a professional Finance Minister, presented a safe and cautious budget that with the full support of all stakeholders could save South Africa from the dreaded ratings downgrade.
Major points from the budget were:
- There would be no increase in Vat so as to place no burden on the poor;
- Nominal increases in tax for the higher income earners and moderate tax relief for the lower and medium income earners. There was no change in the marginal rate of tax;
- Transfer duty on property sales above R10 million will be raised from 11% to 13% from March 1 2016;
- Capital gains tax for individuals will rise from 13.7% to 16.4%, and for companies from 18.6% to 22.4%;
- The general fuel levy will be raised by 30c/litre to R2.85/l for petrol and R2.70/l for diesel, effective April 6 2016;
- The plastic bag levy is increased from 6c to 8c per bag;
- Government proposes to introduce a sugar tax on 1 April 2017 to help reduce excessive sugar intake;
- A tire levy will be implemented, effective October 1 2016;
- There were the usual increases in the so called sin taxes with cigarettes increasing by 82c/packet of 20 and beer by 11c/340ml;
- There was an average increase of 6% in the various social grants
- An allocation of R16,3bn was made to provide for the freeze in tuition fees at universities in 2016 and clear student debt through the National Student Financial Aid Scheme (NSFAS) for the years between 2013 and 2015;
- South Africa will contribute close to R12bn towards the New Development Bank (also known as the Brics Bank);
- R3bn has been set aside as a contingency reserve, should emergencies arise;
- The expenditure ceiling was also cut by R25 billion over the next three years to bring the budget deficit down from 3.9% in 2015/16 to 3.2% in 2016/17 and 2.4% in 2018/19;
The Minister stressed the need to reaffirm government’s commitment to close the gap between spending and revenue, implementing a plan for stronger economic growth and cooperation between government and the business sector
Gordhan mentioned two cost cutting initiatives being the restrictions on filling managerial and administrative positions and improvements around future procurement. These items are however difficult to monitor. More disconcerting was his failure to address how government plans to deal with the current levels of corruption and mismanagement.
Minister Gordhan reaffirmed infrastructure investment as a priority under the National Development Plan (NDP). The 2016 Budget Speech set out implementation measures for the NDP in terms of which infrastructure investment is a crucial element. R870 billion has been allocated to infrastructure projects as testament to the importance of investing in these projects. Specifically projects in the energy, transport, education, health and water sectors.
With local elections set to take place later this year Gordhan limited his discussion on privatisation to mentioning the possibility of partial privatisation in the ports and freight rail sector. This is not surprising given that privatisation is opposed by many ANC members as well as their allies in the Tripartite Alliance and is therefore seen as a political minefield.
He stressed that there is no room in the budget for underperforming state entities. It is common cause that these entities are large and inefficient. The speech touched on the possibility of phasing out irrelevant entities and amalgamating others where they overlap. Gordhan steered clear of giving a concrete plan on how or when this would be done.
It would have gone a long way to allay fears if he had singled out South African Airways for immediate action to assure the country and potential investors that the National Treasury has some degree of autonomy. That it will not be pressured into bailing out non performing enterprises.
Government departments were warned by Finance Minister Pravin Gordhan and President Jacob Zuma to tighten their belts and implement prudent financial measures due to the current economic climate. Gordham in fact set an example by flying economy class on a recent flight from Cape Town.
But will this work?
I have reservations; cost cutting is always difficult particularly when your boss does not lead by example. The day before the budget Zuma announced an 8% increase for Senior Traditional Leaders and R 91 000 for the Headmen / Headwomen. These increases are way above inflation but are politically expedient because they control millions of votes.
The question to be asked is with the elections due in August will Zuma again crumble during the civil service wage negotiations in July.
No sooner had the budget speech been delivered and the ANC controlled eThekwini (Durban) Municipality announced that they are about to splurge about R160 000 sending a large delegation of forty councillors plus additional officials on a three-day cruise to Portuguese Island, Mozambique. The delegation will sail on the luxurious MSC Sinfonia at the weekend.
Mark my words these cost savings will not be achieved and Gordhan will come to parliament in November for an additional appropriation bill.
I would have hoped for a statement of plans to start to reduce the number of embassies South Africa has. The 122 South African foreign diplomatic missions is the highest number of embassies for any country after the US at 126 missions. These missions cost R3.2 billion a year and rising with the depreciation of the Rand. Other African countries e.g. Nigeria’s already cutting back on their overseas missions.
He should have announced the intention to reduce the size of the cabinet from 35 Ministers and 37 deputy ministers. Compare to Kenya at 18; Japan at 17; UK at 21; USA at 15 and Germany at 14.
I am not saying that the cuts should be immediate but an indication that it will be phased in. However, this is not politically expedient to ‘retrench ‘senior comrades.
It is also a concern that as a result of the drought there will be large imports of feed but do the ports and/or Transnet have the capacity to cope?
As usual the opposition parties waded in with their comments on the budget and outlining what they believe the effects of the budget would be.
Personally I think that the UDM Chief Whip Nqabayomzi Kwankwa hit the nail on the head when he commented: “It’s a good Budget, very balanced… This thing is possible provided president Zuma keeps his mouth closed”
COPE leader Mosiuoa Lekota agreed, but said further cost cutting could have been achieved by reducing the size of President Jacob Zuma’s executive, the largest in democratic South Africa. “He (Gordhan) is looking at the needs of the country. All of us have a commitment to save our country,”
DA finance spokesman David Maynier described the Budget as “a little disappointing”. “There’s nothing new that promotes economic growth. I would have liked the minister to be far more robust and make a much stronger statement on the part-privatisation of the state-owned entities (SOEs),” he said.
Maynier said “We were also disappointed that instead of tax increases the minister did not announce other revenue raising measures such as the sale of nonstrategic state assets, which could have raised billions in revenue. We were also disappointed that the minister did not announce real spending cuts including reducing the size of President Jacob Zuma’s bloated cabinet, which could save up to R4.7bn,”
Maynier bemoaned the fact that the minister did not announce any significant new measures to boost economic growth and create jobs, and fell short on his stated commitment to fiscal consolidation.
The Economic Freedom Fighters and the Congress of the People agreed that the size of the cabinet is excessive.
Pieter Mulder of the Freedom Front Plus welcomed the absence of drastic tax increases to supplement a deficit in the national Budget. He continued that “It is disappointing that the minister had found it necessary to increase the fuel levy with 15%. It will have a far-reaching impact on the economy, inflation, and on every individual.”
Mulder said it was in the country’s interest for Gordhan to send a strong message to ratings agencies. The government had to show it was serious about combating corruption, increasing growth, and enforcing financial discipline in the public service.
Business was largely positive, with Chamber of Mines CEO Roger Baxter saying Mr Gordhan’s budget “struck all the right notes” and represented a “positive contribution to stabilising the economy, to maintaining an investment-grade rating and to creating stimulating partnerships in pursuit of growth”.
The CEO of the South African Chamber of Commerce and Industry, Alan Mukoki, congratulated the minister for not increasing value added tax, for limiting personal tax increases and for providing relief of R5.5bn to mainly low-and middle-income earners. He, however, cautioned that the increase of 30c/l to the fuel levy was set to effect transport negatively, and lead to an inflationary increase in the price of goods and services.
Mr Mukoki stated “SACCI is encouraged by the emphasis that the minister placed on inclusive growth, the plan for a strong mixed economy, improvements in education, investment in infrastructure and acceptance (of) partnerships between government, business, organised labour and civil society as pre-requisites for policy coherence and more rapid development,”
Despite economists lauding Finance Minister Pravin Gordhan’s Budget Speech, the rand plummeted almost 3% overnight and the December 2026 bond yields soared by 15 basis points because the markets failed to be convinced that this budget would avert South Africa from a credit downgrade to junk status.
With the continued spat between the Hawks and Gordhan the markets remained week and the prospects of a credit downgrade loomed large on the horizon causing the presidency to issue a statement on Friday, two days after the budget, saying that Zuma has full confidence in Gordhan, and that the “rumours and gossip” insinuating a conspiracy against Gordhan are baseless.
The following Wednesday Police Minister Nathi Nhleko defended the Hawks against accusations that the list of questions sent to Gordhan was meant to discredit the man in control of South Africa’s purse strings. Nhleko already discredited in the Constitutional Court over his ‘illegal’ Nkandla report, insisted that Hawks investigators were just doing their jobs in investigating the existence of a “rogue spy unit” within the SA Revenue Service (Sars), Nhleko said the fact that Gordhan was sent a list of questions did not mean he was the subject of a probe.
However, remember that the Hawks unit had already claimed “to have a strong case against Gordhan”.
And so the intrigue continues. Zuma is in Nigeria, his second foreign trip since the budget (cost cutting?), while Pravin Gordhan is in the United Kingdom and the United States trying to convince investors that South Africa is a good destination for investment.
Regrettably while policy and legislative actions continue on the current course international investors will shy away from South Africa. As much as they trust Gordhan they distrust Zuma.
Unfortunately for Gordhan the ball keeps on bouncing in the wrongly. Despite the weak rand our exports have failed to boost exports resulting in the current-account deficit increased to 5.1% of GDP in the fourth quarter up from the forecast of 4.4%. Inflation has risen to a 17 month high of 6.2% in January compared to the Reserve Bank target of 3% to 6%.
The chickens are now coming home to roost following Zuma’s firing of Nene as Minister of Finance in December. Foreign investment in stocks and bonds declined to a R300 million outflow in the fourth quarter compared to a R13.7 billion inflow in the third quarter.
On Wednesday 9 March Moody’s Investors Service placed the ratings of the government of South Africa on review for downgrade.
The decision to place the ratings on review was prompted by the continuing rise in risks to the country’s medium-term economic prospects and to its fiscal strength, notwithstanding the tighter fiscal stance undertaken in the 2016/17 budget. The review will allow Moody’s to assess to what extent government policy can stabilize the economy and restore fiscal strength in the face of heightened domestic and international market volatility.
Moody’s could downgrade the rating if the review concluded that government policy and strategy is unlikely to lead to a reversal in the debt trajectory. Evidence of further shocks to growth and/or lower confidence in policymakers’ commitment to fiscal restraint could lead to a downgrade.
Further deterioration in the investment climate would also place downward pressure on the rating if it undermined medium-term growth prospects and/or the availability of external financing for the current account deficit. More generally, indications that the slowdown in growth will be even deeper and more protracted than currently expected would be negative for the rating.
Unless there is a dramatic change in attitude by Zuma and his cronies to both Gordhan and the markets a downgrade is inevitable.
Maybe that is the plan, discredit Gordhan and then take control of the Treasury. The President has publicly declared that he “places the ANC above South Africa” and he has demonstrated that he places Jacob Zuma above the ANC and his comrades.
As repulsive as it may be perhaps the solution suggested in the Editorial comment of the Citizen on 9 March 2016 has some merit.
Because of President Zuma’s propensity to open his mouth to change feet perhaps it is time to do the wrong thing for the right reason. Maybe it is time to negotiate an exit deal. A deal that would see Zuma resign as President and leave public life in exchange for indemnity from any prosecution. A new president’s first act would be to issue a pardon, as President Gerald Ford did after Richard Nixon resigned.
The rand would like that, very much.
Until next time,
This newsletter is published by Clive Hatch former Leader of the Opposition in the Mpumalanga Provincial Legislature and former DA Provincial Leader. These views are my personal views and do not represent those of any other person or organisation.