What a “stark” difference a few months can make in the life and finances of a country. At the tail-end of last year, Finance Minister Tito Mboweni, sounded alarm bells about the possible deterioration in the fiscus to levels comparable to that of Argentina, the poster child of economic ruin over the past three decades.
The warnings all seemed to portend tax increases in this week’s budget. But instead, the minister and his team, benefiting from better-than-expected economic recovery and tax collection, provided modest tax relief for both individuals and companies.
It will go far in supporting a continuation in the recovery in the face of a still persistent threat of the Covid-19 pandemic.
While we welcome the reprieve offered by higher commodity prices and revenues that have improved our metrics with the lowering of the budget deficit to 14% of GDP, we shouldn’t discard any of the comparisons with the Latin American country, a land of chronic financial turmoil.
The figure, while an improvement from the 15% forecast in October, is still shocking and points to an economy still in distress from both the pandemic and the deep-seated structural fault-lines that have plagued us for what seems an eternity. Metrics such as debt-to-GDP for 2020/21 may have declined to 80.3% from 81.8%, but we still remain far off the healthy levels recommended for emerging market economies.
The key challenge facing the country is economic growth. It’s only through much higher levels of growth that the government’s fiscal position can be sustainably improved and tax collection increase to comfortably fund our growing societal needs.
The better-than-expect recovery we are experiencing may after all prove fleeting as they are based on global market sentiment more than any actual change to South Africa’s fundamentals. We are just recovering from a second and more deadly wave of the Covid-19 pandemic that saw a reintroduction of stringent restrictions in the economy to save lives.
That impact was evident in the data released earlier in the week, showing unemployment rising to 32.5% in the fourth quarter of last year. With our vaccine rollout still in its nascent stage, there are expectations of yet another surge in the pandemic in our winter months, which will all likelihood see some restrictions reintroduced. Outside of the risks posed by the disease, our electricity grid remains prone to load-shedding as Eskom deals with a decade-long maintenance backlog. Our fundamentals are still poor.
Infrastructure is critical to expanding the capacity of the economy and increasing its size on a more sustainable manner than mere market movements in the price of copper or iron ore. As such, I am concerned by the decline in infrastructure spending in the budget despite promises by both President Cyril Ramaphosa and Minister Mboweni to prioritise investment over consumption spending.
The medium-term expenditure framework allocation for infrastructure may have fallen only 2.9% to R791-billion, but what was of more concern is that the outcome for the 2019/2020 year has been confirmed at R187.4-billion. It is 37% below what had been estimated in last year’s budget, some R70-billion of planned investment that just quite simply didn’t happen.
The shortfalls are a combination of capacity and fiscal constraints of the state, a procurement policy environment for infrastructure that remains onerous and a public sector that has experienced a skills exodus over the past decade, which has reduced its ability to manage complex projects. There’s an urgent need to improve the overall environment for infrastructure procurement.
Changes to the framework for the public-private partnerships were announced in the Budget Review that will make them easier to use. These are welcome and serve as the best way for the state and business to work together to deliver infrastructure. There was also clarity that the Infrastructure Fund will be focused on blended finance solutions to enable greater use of these partnerships under the National Treasury framework. Our hope is that it reverses a trend of declining numbers of partnerships.
We look forward to talks with Treasury on revising the framework that’s expected to take place next month, which at the end of the day must open up a greater pipeline of projects that move beyond the pre-feasibility and conceptual stage. We need to move onto picks and shovels.
Unlocking our vast growth potential is still very much a game of reform, which we hope this boon of higher commodity prices won’t detract from. We needed a bit of luck to relieve some of the pressure and to improve sentiment languishing at levels last seen in the mid-eighties.
With comparisons with Argentina hopefully still top of mind, the state with the help of business and other social partners must work together to escape the low growth trap of the past decade. A successful vaccine rollout is our most urgent task to at the very least meet the 3.3% growth forecast by National Treasury. It would mark our highest growth mark in exactly 10 years.
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