The Budget 2015 Reply

Prof Raymond Parsons of the Potchefstroom Business School has an excellent summary and interpretation of yesterday’s Budget Speech and we are happy to re-post his press release here.

Prof Raymond Parsons

Prof Raymond Parsons

“Finance Minister Nene did a workmanlike job in his maiden Budget Speech today to manage the headwinds, tailwinds and possible whirlwinds facing the SA economy this year. He rightly cast his approach within the framework of the National Development Plan but the challenge remains to translate the proposals and intentions into changes that will make a visible difference to delivery, employment. He pressed most of the right buttons and the emphasis on small business must be welcomed.

The Minister of Finance recognised that domestic constraints were the most important ones hampering SA’s economic performance and needed to be prioritised. The question is whether the ‘mix’ in the Budget has been good enough to push the economy forward in a meaningful way. We are stuck with a 2% growth rate this year but it must not become a ‘low growth trap’. The growth prospects in 2015 still have some downside risks, stemming mainly from the uncertain energy and labour relations outlook.

Implementation remains the name of the game and it needs the full support, not only of the whole government, but also the private sector, if the NDP targets are to be reached and growth enhanced. The Medium Term Strategic Plan is now the instrument of delivery of the first five years of the NDP andnow needs to be critically interrogated. The jury is presently still out on what precise impact the Budget and its message will have on investor confidence in the medium-term.

The financing proposals for certain parastatals, and especially Eskom, remain the Achilles Heel of the 2015 Budget. The Minister of Finance agrees that uncertain electricity supply is the biggest single constraint on SA’s economic performance, but whether only injecting money into Eskom without fundamentally restructuring the organisation will remove the energy uncertainty bottleneck remains a moot point. Parastatals like Eskom need completely new business plans if they are to assure supply and win back the confidence of the business sector. Our faith in state-owned corporations should not be naive or based on cash alone, but also rooted in fundamental restructuring of the energy market.

We need to recall that the 2015 Budget is now predicated on an expected growth rate of only 2% this year, which does not leave much room for error in what would still be acceptable public debt ratios if that growth expectation were not to materialise. We are not yet quite out of the ‘public debt woods’.To meet the budget shortfall this year the Minister of Finance tax-wise in the Budget again aimed at ‘soft targets’ like high income-earners, the fuel levy and ‘sin’ taxes. It remains a basically minimalist budget at present, yet the warning signals are there.

Apart from any other considerations as to why higher job-rich growth is necessary in SA, higher growth is increasingly now needed to prevent the limited tax base itself becoming another constraint on making sensible public finance decisions in future Budgets. Eventually all roads lead back to faster economic growth.

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