Economic Freedom and Fiscal Policy – Previewing the Medium-Term Budget Policy Statement 2011

Does the MTBPS have the right toolkit?

As Minister Pravin Gordhan delivers governments Medium-Term Budget Policy Statement (MTBPS) for 2011, the debate on economic transformation is gathering pace. In the same week, as the MTBPS is announced both the African National Congress Youth League (ANCYL) and the Young Communist League (YCL) will hold events focussed on economic transformation. These are separate events, and speak to the broader political positioning that sadly is becoming a permanent feature of the African National Congress.
The strategists at the National Treasury will have to consider these events, but will also have to look towards how the market will react.  The biggest challenge is that rating agencies have raised concerns about the level of government debt. Whatever one may think of the ratings agencies – who contributed to the global financial crises by providing good ratings to dubious investments – they wield power within the market, which in turn impacts on investment choices. Moreover, South Africa will be borrowing to finance primarily the expansion of power stations, but potentially in other areas as well. In other words, the perceptions of rating agencies and larger private companies matter. Their opinion should matter less, but the reality is that they have a powerful set of mechanisms to influence public policy and to ultimately impact on economic growth.

The difference though is that popular pressures for economic transformation have heightened in South Africa and are making the rich and government uncomfortable. It offers Minister Gordhan the opportunity to break the tradition of the MTBPS as a fairly boring and predictable event. His speech should provide leadership on questions of economic transformation. However, it is merely a dream to expect a defining speech, and instead expect the usual “responsible” speech, with the accompanying documentation demonstrating the technical skill at the National Treasury.
Zapreneur will be covering the MTBPS, and several issues are likely to emerge.

Fiscal Policy

The first being fiscal policy.The major fiscal policy issues:

  • Fiscal Guidelines: Minister Gordhan has tabled a draft “fiscal guidelines” in his February 2011 budget speech. They are important, and I have given my critical support to the draft for one reason – it is the best route to protecting public spending from special interests, and provides the means to protect social spending. Not many people see the fiscal guidelines in this way, with the strongest criticism being that it is neoliberal from the left, and the financial sector whispering that the process is too democratic. Minister Gordhan is unlikely to table the “fiscal guidelines”, because the groundwork for a wide societal acceptance of the proposal is simply not in place.  The guidelines however require careful consideration, and should be ready for submission at the next budget speech in 2012.
  • Deficit and social spending: The numbers on the deficit will be closely watched, especially since the ratings agencies have indicated worries that debt may be growing too fast in South Africa. The National Treasury will be working overtime to resolve the issue, and it is more than likely that there will be a downward revision on the deficit to Gross Domestic Product (GDP).
  • Wealth Tax : The talk of a wealth tax has gathered pace. The basic idea harks back to an old idea of a “solidarity tax” developed in the 1990s. The Minister will certainly have the space to make moral arguments for a wealth tax, but probably not the political support to drive through an increase in personal income tax for the wealthy.
  • Cutting wasteful spending: Mr. Gordhan and his team should make prominent their work on cutting wasteful spending. In fact, it should be a defining feature of government – we cut spending from wasteful programmes, and put taxpayers money to good use. With the tax base unlikely to increase under conditions of moderate economic growth and Treasury probably reducing the deficit, government will have limited options to grow its spending base. In this context, a massive process of reprioritising government spending is needed, and must be supported. However, as shown below it depends on what is being spent.

Spending Choices
Second, spending choices are likely to feature strongly. The MTBPS is usually not the event to outline actual spending plans, but this year it may well happen. There are so-called “big ticket items” that are gathering pace and will require statements. Development activists will most keenly focus on the following key budget votes:

  • Small business rescue packages – Treasury has been laying the ground for an announcement to support factories. There should be an announcement on some of the details.
  • The nuclear deal – The building of nuclear power plants to provide South Africa with electricity will cost R 1 trillion. Minister Peters confirmation of this public policy stance by government is worrying. It is a decision we do not support.In fact, the nuclear deal could “steal” all the additional spending that government intends to go towards entrepreneurs and small business (More on this area in future).
  • National Health Insurance –  A decision we do support is the introduction of the National Health Insurance. Led by the star of the current Cabinet – Minister Aaron Motsoaledi – the Department of Health is bringing stakeholders on board, and building the policy arguments for more resources to realise the vision of the National Health Insurance.
  • Community Works Programme – Cabinet took a decision to extend the Community Works Programme to 1 million participants. It is a decision, I fully support. Minister Gordhan potentially will give details on the costs of expanding this foundational programme to reduce inequality in our society.
  • Jobs Fund – The application process for the Jobs Fund should be entering its phase of completion. Hopefully, Minister Gordhan uses the space to update South Africans on the selection process. Potentially, given the envisaged process outlined by the administrative team announcements on successful applications may even be outlined in the speech.
  • Youth Wage Subsidy – It would be surprising that if there was a major announcement on the subsidy for young unemployed South Africans, proposed by government. It is a political hot potato, as it is contentious whether the premise underlying the wage subsidy proposals correctly diagnose the reasons behind high levels of youth unemployment.

Political and economic realities
The speech thus could provide important signals on how government is pursuing its economic transformation agenda. It will dutifully seek to speak to both the markets and the people, and in so doing receive a mix of praise and criticism. The moment however is ripe for a bolder statement, one that provides leadership is needed. At a minimum, it should provide the coherent narrative on economic transformation that is lacking from the side of government. Expect instead, a workmanlike performance, not because the Minister does not care, but because as a society we lack the maturity to move debates forward. The stalemate on economic transformation will be reflected in MTBPS 2011.
Zapreneur will be covering the MTBPS 2011. Subscribe to Zapreneur, and receive email alerts on new content. 

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