macroafricaintel | Funding Ramaphosa’s plan

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

See you again somewhere”. This was likely outgoing finance minister Malusi Gigaba’s response to a reporter’s question about whether he would be delivering the 2018 budget speech on 21 February. In my Premium Times column ahead of President Cyril Ramaphosa’s maiden State of the Nation Address (SONA) titled “Ramaphosa’s priorities” (see link viz., I advised that he should be replaced. Opposition Economic Freedom Fighters (EFF) leader Julius Malema was not as polite: “The first thing he needs to do is fire Malusi Gigaba we can’t have a delinquent as minister.” Market participants would almost certainly be more than a tad disappointed if Mr Gigaba delivers the budget speech on Wednesday. Although the notice is short, it is important that just as there is now a breath of fresh air in the Union Buildings, there should be similar freshness at the Treasury. Mr Ramaphosa’s “new era” requires that someone similarly well-tested takes the reins at the finance ministry. Besides, the plan announced by the president in his SONA almost certainly means the budget that was being prepared while former president Jacob Zuma was still in charge, needs to be revised significantly, if not rewritten from scratch.

Many promises, little money
Mr Ramaphosa’s excellent speech last week touched on key issues like jobs, local content, digitization of industry, and so on. These were, however, just high level highlights with little detail. Thus, coming just about a week afterwards, the budget is an opportunity for the fiscal authorities to elaborate more on the president’s vision; an action plan, so to speak. This is important because after Mr Ramaphosa’s widely-applauded speech, questions were raised about how he planned to fund his new initiatives. Mmusi Maimane, leader of the main Democratic Alliance (DA) opposition party, put it rather well: Mr Ramaphosa gave “a speech filled with a lot of promise but as we would see in the budget…very few amount of money to implement”. New proposals like the paid internship programme and small business and innovation fund would have to be budgeted for certainly; that is, if the new president wants to maintain his credibility. Never mind that it remains to be seen how the similarly recent free higher education policy would be financed. It would also be interesting to see how much of the proposed efficiencies, like reducing the number of government agencies and streamlining procurement procedures, would be actioned.

Raise taxes, sell SOEs, lose weight
To put the authorities’ finances back in shape, some tough measures would be required. So, earlier assertions by Mr Gigaba like there being no need to raise the value added tax (VAT) to fund free higher education is simply wishful thinking. In any case, he was probably playing to the gallery. Public debt is already about 54 percent of GDP (2017/18) and expected to be over 60 percent in a couple of years. Debt servicing is expected to be about 15 percent of revenue by 2019/20, from 13 percent most recently; and should rise over the next 3 years by about almost the same rate of 11 percent. Clearly, additional borrowing to make up for projected revenue shortfalls of R50.8 billion in 2017/18, R69.3 billion in 2018/19 and R89.4 billion in 2019/20 would be antithetical to the almost existential need for fiscal consolidation. At the very least, the debt level must be kept below 60 percent of GDP to avoid a crisis. In the medium-term budget policy statement (MTBPS) in October, the Treasury estimated spending cuts or tax hikes of about 0.8 pct of GDP would be required to achieve this goal; about R40 billion for 2018/19. So the issue is not so much about whether there would be tax hikes but how much. In any case, new money could also be found from selling inefficient state-owned enterprises; of which there are quite a few. Besides, there is still much more that could be done to cut costs. The cabinet and public service are bloated, for instance. All in all, my forecast for the budget deficit over the next three fiscal years is about 4 percent of GDP; which would still be an improvement from the revised expected outcome of 4.3 percent for the 2017/18 fiscal year.

Find growth
In the October MTBPS, Mr Gigaba highlighted key fiscal risks to be further revenue shortfalls, compensation budgets, rising debt service costs, funding gaps in infrastructure and social services, and financial deteriorations. As commodity prices have been ascendant lately, there could be some improvement in revenue, at least. Even so, the economy would need to start firing from all cylinders to speed up lacklustre growth in recent years. At below 1 percent in 2017 and likely just a little above that this year, there are limitations to how much more taxes can be extracted without some incremental economic growth. Mr Ramaphosa has identified mining, agriculture and tourism as the sectors to provide additional output. But even if he backs his positive rhetoric with action like one expects, it would take some time before the gains materialize.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz.

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