Every budget tells a story

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.