There was something for the so-called "leftists" and the "nationalists" in Finance Minister Pravin Gordhan's inaugural Medium-Term Budget Policy Statement (MTBPS) address to Parliament last week.
While providing few signs of a material leftward shift in South Africa's macroeconomic trajectory, the Minister did hint to the possibility that taxes might need to rise, while calling for greater coordination between the South African Reserve Bank (SARB) and the National Treasury to deal with the current volatility and lack of competitiveness of the currency. Both issues have been flagged as serious constraints by the African National Congress' (ANC's) left-wing allies, the Congress of South African Trade Unions and the South African Communist Party.
In addition, the MTBPS gave far greater emphasis to trade and industrial policy than has hitherto been the case, with a reinforcement of the already stated aspirations of scaling-up support for labour-rich industrial development, as well as of the need to "calibrate" South Africa's tariffs to South Africa's industrial policy vision.
Gordhan indicated that higher taxes might be necessary to fund a possible "wage subsidy" and other labour-absorbing industrial incentives, as well as if the deficit, which is being funded through increased borrowings, was not reduced as envisaged. There was also possibly a need to not only broaden the tax base and improve compliance, but also to introduce new taxes, such as environmental taxes, to achieve environmental and revenue objectives.
Should higher taxes be introduced, it would be a significant departure from South Africa's recent budgetary stance, which has seen a series of personal and corporate tax cuts being instituted over the past seven years. But, despite these cuts, the country has recorded strong tax-revenue growth, supported by strong economic growth, as well as improvements to tax administration and compliance. In fact, Gordhan, who was previously commissioner at the South African Revenue Service, noted that, while economic growth has averaged 4,2% a year over the period of cuts, tax revenue grew by 7,8% a year in real terms.
On the exchange rate, Gordhan said that the "volatility and level" of the rand required attention, particularly because the strong rand negatively effected investment in export-led industries. The National Treasury and the SARB would "enhance [the] coordination of fiscal and monetary policy to support low inflation and a more stable and competitive real exchange rate", including the accumulation of reserves to reduce exchange rate volatility.
On the other hand, Gordhan argued that the inflation-targeting framework, despised by many on the left, is an important element in macroeconomic coordination. "It has assisted in lowering inflation expectations, and in preventing inflation from undermining our competitiveness," he said.
In reinforcing the inflation-targeting philosophy, Gordhan has possibly constrained the debate on the role that monetary policy can play in influencing the rand.
Theoretically at least, using interest rate cuts or reserve accumulation to weaken the rand has the potential to be inflationary. So, if the monetary authority's primary mandate continued to be controlling inflation, then there would be limited scope for weakening the rand. However, it was possible to "mop up" or "sterilise" the inflationary effect of reserve accumulation by selling bonds. But there would bw costs associated with such interventions - cost which rand-weakness advocates argue are well worth bearing.
The more immediate instrument chosen to possibly weaken the rand lay in Gordhan's announcement of further exchange-control liberalisation - a moved welcomed by business, rather than by the left.
The proposed reforms included: allowing South African companies to invest in Southern African Development Community member states through offshore intermediaries; increasing the current R50-million limit for company applications to undertake outward investment to R500-million; the removal of the 180-day rule requiring companies to convert their foreign exchange into rand; the doing away with the R250 000 limit on advance payments for imports; allowing South African companies to open foreign bank accounts for permissible purposes without prior approval, subject to reporting obligations; and replacing the current paper-based monitoring system of exports with a more efficient electronic system.
Should there be a significant uptake, which some argue is unlikely, owing to the unhealthy state of finances elsewhere, the rand should weaken.
Overall, though, the statement, which was published amid South Africa's first recession since 1992, held the macroeconomic line, with Gordhan placing emphasis on the need to strike a "delicate balance" between using fiscal and monetary measures to stimulate the economy and avoiding the build-up of "unsustainable debt that will impose costs on future generations".
That said, Gordhan was convinced that "fiscal space" remained to run a significant deficit in support of an economic recovery and employment stabilisation and growth. But he also stressed that South Africa should only run with such expansionary and fiscal and monetary policies for as long as is necessary.
The budget balance would shift from the marginal deficit position of 1% in 2008/9 to an expected deficit of about 7,6% of gross domestic product (GDP) in 2009/10, with State-owned enterprises and public-sector borrowing likely to reach 11,8% of GDP this year.
As widely anticipated, the new deficit figure was far worse than the 4% estimate provided by Gordhan's predecessor, Trevor Manuel, who is now Minister in The Presidency Responsible for the National Planning Commission. However, the estimate was better than some forecasts, with a few analysts warning that the deficit could be worse than 8% of GDP.
The stabilisation of expenditure growth in combination with a recovery in budget revenue was expected to result in the deficit declining to 4,2% of GDP by 2012/13.
But in financing the consolidated government deficit, borrowing by national government was now projected to reach R175,8-billion in 2009/10, declining gradually to R145,1-billion by 2012/13.
Net public debt would rise from its relatively modest level of 22,6% of GDP, R525,7-billion, recorded in 2008/9 to 41,1% of GDP, or R1 200-billion by the end of the period in 2012/13. During 2009/10, net loan debt would increase to R703,4-billion, or 29,2% of GDP, and rise steadily to 34,2% of GDP in 2010/11 and to 37,8% of GDP in 2011/12.
Foreign debt as a percentage of GDP would remain modest at between 4,2% and 5,4% over the period covered by the MTBPS.
By contrast, debt ratios in advanced economies are projected to rise to 110% of GDP by 2014 from 80% before the crisis.
Gordhan also provided a radically revised GDP growth estimate, reporting that government was expected to decline by 1,9% in 2009 - In February, Manuel forecast that the economy would grow by 1,2%.
"Positive GDP growth is anticipated in the fourth quarter of 2009, with growth of about 1,5% projected for 2010, reaching 3,2% in 2012," he said, indicating that, while public-sector investment would be robust, household consumption, the largest component of GDP, was likely to remain weak as households reduced their considerable debts.
The MTBPS was forecasting growth of 1,5% next year, followed by 2,7% in 2011/12 and 3,2% in 2012/13, well below the country's aspiration of 6% growth sustainable from 2010 onwards - a level seen as key to providing the platform for greater labour absorption.
Private-sector investment was only likely to recover in 2011, underpinned by higher commodity prices.
Growth prospects in Southern Africa and Africa, in general, remain relatively healthy, with growth of 4,1% projected for 2010 due to a recovery in investment in mining, petrochemicals, tourism and transport infrastructure.
But the slowdown had hit tax revenues, with tax revenue having fallen by about 3,2% of GDP since peaking in 2007/8, with the greatest declines in value-added tax receipts, company taxes and trade taxes.
Revenue was expected to fall to R657-billion, or 27,3% of GDP this year, falling from R692-billion, or 29,8% of GDP, in 2008/9. Expenditure would rise to R841,4-billion, or 35% of GDP in 2009/10, leaving a negative balance of R183-billion.
The MTBPS was forecasting higher revenue of R743-billion, or 28,4% of GDP, in 2010/12, climbing to R1052-billion, or 29,6% of GDP, by 2012/13, when the deficit should have fallen to 4,2%.