By Albert van Zyl
In his first important speech as finance minister, Pravin Gordhan’s main story was that the budget deficit would be 7.6% of GDP, not 3.8% as projected in the February budget. And the reason for this, he told us, was that Sars collected a lot less tax than what the Treasury thought they would. Next the minister told us that even though these are tough economic times, the government is going to stick by its spending commitments and keep spending money on social services, infrastructure and job creation. Government would also try to save some money and catch people who don’t pay tax and are involved in suspect procurement deals. He rightfully got some boos from his left for his procurement comments, but for the rest the whole house of parliament seemed to believe this story.
But there is another story that one could tell. It is a story of a government that increased expenditure by almost 18% in its last budget, but who somehow contrived to underestimate revenue collection by more than 11%. It is hard to accept the financial slow-down as explanation for this under-collection. The extent of the crisis was clear for all to see when Trevor Manuel presented his last budget. The economy had shown negative growth for two quarters by the time that it was voted into law. So why would a government deliberately underestimate tax collection?
The 2009 budget was presented only about two months before the April elections. The last thing that incoming President Zuma and his allies wanted was a budget with large deficits that opened them up to charges of being “populist”. Yet it had a number of pressing issues to spend money on like the extension of the child support grant, bailouts to Eskom and other parastatals as well as continued large investments in infrastructure.
Zuma’s left leaning allies have been propagating larger deficits since time began, but are smart enough to fear reaction from foreign investors on whom we depend to balance our current account. So what to do? Simply overestimate revenue projections! This gave government an acceptable deficit while allowing it to table an election budget that spent a lot and gave tax breaks to businesses and individuals.
Once President Zuma and his government were safely in place, Gordhan got the awkward task of announcing that tax collections are down because of the financial crisis. And who better, he used to be the Sars commissioner after all. No one would dare to question him.
So which of these stories is true? The medium-term budget policy statement itself does not tell us much about why the revenue projections were so far off. In the end one would need to look into the National Treasury’s economic models to make an informed judgment. But the second story does seem to explain more of the facts than the one Gordhan asked us to believe.
After these financial gymnastics the “left” have the pound of flesh that Zuma owed them. Budget deficits are projected to remain higher than 5% of GDP for most of the next 3 years. By the time the 2012/13 budget is tabled, Gordhan tells us, the tax/GDP ratio will be back at its pre-crisis level of about 30%. But the expenditure-GDP ratio will still be almost 5% points higher than it was before the crisis.
So what if this story is true and the high deficit was not entirely unplanned? Firstly we would have been robbed of an opportunity to debate a major shift in fiscal policy and budget priorities. The “left” would have won without a public debate. Apart from that, Gordhan’s medium-term expenditure framework leaves us very little room to move. The high deficit and a tripling of public sector borrowing leaves little margin for error. Future wage agreements, the introduction of national health insurance and talk of a new arms deal may well make the minister’s job very hard in years to come.
Albert van Zyl writes on politics, economics and personal development. He blogs at the Open Budget Blog and the Next Small Step.
Hey Albert. Good to have you on Thought Leader. My assessement on the revenue decline is three fold. 1. Commodity prices were less than expected. 2. Economi growth slowed down 3. Over optimism on projections to shore up market support.
The deficit is as far as I can tell calculated based on the “structural budget balance” which is the same formula used to get us to a surplus a couple of years back. But, the model needs to be public. However, that means that there is another explanation that it is all part of the plan, and represents continuity. Suprisingly, this is mostly what the private sector analysts are saying. So the higher deficits are planned, according to a policy that has wide support in the market, according to this view. Thought I would just add that to the mix.
But thanks for a thought provoking article.
Great stuff and just what we all need to think about!
I have moments when I think they should go ahead and nationalise the mines (with apologies to miners big and small). They clearly have little idea of the legacy they will inherit; all that water they will have to pump into eternity, all the fatalities, etc.
But essentially, the more mess they make, the more we are left to clear it up, taxes-wise.
Is there any way of winning against any insincere government?
what of the child grant system, that is a financial time bomb that we cannot afford as it encourages rapid population growth but it does not encourage hard work hence a widening deficit.
An interesting argument, but the idea that the ANC would distort projections in order to make the election “safe” is fundamentally flawed:
1. The election was never unsafe. The only question was whether the ANC would maintain their 2/3 majority.
It is far more likely that the inaccurate projections were caused by naivety and/or incompetence. Take the actuals for the past five years, draw a line through them, that gives the projection for next year.
2. The vast majority of voters could not care less about deficits, revenue projections or being called “populist”. Even the ones who do care will not switch parties based on that concern.
Further to Piet Opperman’s comments:
I don’t have the numbers in front of me, but I think that in the past Gordhan (as then head of SARS) and his SARS team consistently *under*-estimated revenues for something like four out of five fiscal years.
This led to budget revenue overruns in each of these years. Could it be that this budget, in an effort to more accurately forecast revenue collections (because surely an inaccurate estimate is as inconvenient whether it is above or below the audited figure), SARS overshot in the other direction?
Of course, by Feb 2009 we were all aware of the global downturn and its expected effects on revenue collection, so maybe I’m just talking rubbish…
I’m an absolute novice on matters financial and find the comments made by knowledgable people facinating. However, even as a financial novice, I cant escape the feeling that there is nothing this government does that is open and transparent. In every policy statement or governmental explanation, there is subterfuge , lies, scams, cover – ups and a general lack of sincerity in dealing with the public. The theoriesd postulated in the above replies are ALL feasable.
On the otherhand, “Comrade Deployment” is a reward system and the deployed have, in probably all cases have no clue as how to manage their jobs (apart from finding out where the honey pot is)
We, the tax paying public are simply expected to condone this lunacy.
Piet Opperman is on the money here
The majority of ANC supporters are poor and enthusiastic supporters of President Zuma’s populist stance and policies.
The question that they ask of political parties is “what are you going to do for me? How are you going to make my lifebetter? What services (especially free to me) will you deliver?”
The various corruption scandals, tender process abuses, cadre deployment are of relatively minor concern to them (bit of major concern to the middle classes and intelligentia).
This phenomenon plays itself out throughout the world with populist governments, from Hugo Chavez’s Venezuela, even to Robert Mugabe’s Zimbabwe.
Chavez, reviled by the West and Western media, is adored by the masses and the poor in venezuela whilst simultaneously hated by the middle classes and inteligentia in Venezuela.
Similarly, despite running his country’s economy into the ground, debasing the currency to the point of worthlessness, and casuing starvation amongst his citizens, Mugabe still retains substantial electoral support.
To ascribe this apparent anomaly to “voter intimidation” is simplistic nonesense.
More like a case of “yes, the formerly productive commercial farms are now unproductive, but at least they are back in the hands of those from whom they were stolen” – Africa for the Africans.
The middle classes in this country as viewed by government as a cash cow to be milked for the benefit of the poor.
The latest move is to fund the SABC from taxation on a sliding scale – guess who pays?
@Ebrahim Thanks. Agreed. But the reason why ‘the market’ accepted the deficit is because they buy Gordhan’s version of the story. The market will start twitching when he overshoots on the deficit again.
@MLH I am not arguing that government is insincere in general. Just that they diddled THIS deficit
@Owen I don’t support the right wing take on grants &social security. Lots of people in RSA genuinely need these. Its the right thing to do.
@Piet I wasnt arguing that the ANC feared the polls. I was rather arguing that they feared the markets. The Manuel debacle showed that they had good reason to.
@Esjayoh I don’t share your despair. Despair debilitates – I believe in action.
@Peter L Piet may be on the money, but he misread my argument. See my response to him above.
@ Albert: well, your emphasis was on the election, not on the markets:
“….gave government an acceptable deficit while allowing it to table an **election** budget that spent a lot and gave tax breaks to businesses and individuals.
Once President Zuma and his government were **safely in place**….”
You don’t even mention the “markets”. Although, now that you explain it, I can read it that way.
Peace, brother….
Thank you, thank you, Thank you. I can tell that you have no wish to reap the rewards of a Bum kisser. Then another Thank you to Thought leader to have finally found the guts to print this when for so long the business section of M&g avoided printing anything that did not fit their mold of what was right.
Pity you did not come right out and say it. Trevor Manual is a liar who wanted a secure position in the new government. Then we have the ANC knowing that few dared or had the brain power to see through the smoke and mirrors have added to our woes with populist money throwing instead of some real head scratchingor real answers to the problems ahead.
Of coarse to top that we have big business who only stand for the rights of big business and nod sagely at every ANC comment not wanting to rock the boat.