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Budget 2022 hits many of the right notes, but …

01 March 2022 | Story JP Geldenhuys | Photo Supplied

Opinion article by JP Geldenhuys, Lecturer: Department of Economics and Finance, University of the Free State.

The 2022 Budget was delivered this week by Minister Enoch Godongwana against the backdrop of higher inflation, very high and increasing unemployment, increasing poverty and sustained low average annual GDP growth. Budget 2022 hits many of the right notes, particularly regarding the improved state of public finances, as well as the measures that were announced to stimulate economic growth and support ordinary people. However, many uncertainties and risks remain that endanger the outlook for both public finances and growth, many of which are beyond the control of government, such as the future course of the COVID-19 pandemic, geopolitical conflict, and the tightening of monetary policy around the world, but particularly in advanced economies, as a result of persistently high inflation. Other risks to the public finances, such as poorly performing state-owned enterprises (SOEs) and local governments, and high levels of corruption in the public sector, fall squarely within the control of government. But it is debatable whether a government that is losing popular support is willing to expend the political capital necessary to address these risks.

Budget 2022 provides real (inflation-adjusted) tax relief to taxpayers, notably by adjusting income tax brackets for inflation. Additionally, there are no increases in the general fuel levy and the Road Accident Fund Levy (but there is a one cent per litre increase in the carbon tax). Social grant amounts also increase more or less in line with inflation, with the old age, disability, care dependency and war veterans grants increasing by R90 per month in April and a further R10 per month in October, while the child support and foster care grants increase by R20 per month in April. As announced by President Ramaphosa in the State of the Nation address, the social relief of distress grant was extended for another 12 months, with R44 billion being set aside. This means that National Treasury projects that almost 10.5 million people will receive the grant, valued at R350 per month, over the coming year. With the extension of the social relief of distress grant, more than 46% of South Africans now receive a social grant.

The outlook for the deficit and government debt has improved notably since the 2021 Budget and 2021 Medium-Term Budget Policy Statement (MTBPS). The consolidated budget deficit is projected to be 5.7% of GDP in 2021/22, before declining to 4.2% of GDP in 2024/25. Furthermore, the primary balance, which captures the difference between government revenue and non-interest spending by government, is projected to move from a deficit of 1.3% of GDP, to a surplus of 0.6% of GDP by 2024/25. This will be the first time that the primary balance will be in surplus since 2008/9. This development should be welcomed, because in countries like South Africa, where interest rates exceed growth rates, primary surpluses are necessary to ensure that the government debt-to-GDP ratio does not increase continuously. In other words, we need to run primary surpluses to ensure that fiscal policy is sustainable. The National Treasury is projecting that the government debt-to-GDP ratio will peak at 75% by the 2024/25 fiscal year, before decreasing gradually to 70% by 2029/30. The projected peak of the government debt ratio is lower than the peak of 78% projected in the MTBPS of October 2021, which in turn was much lower (following rebasing of GDP) than the peak of 89% projected in the 2021 Budget.

The projected paths of the deficits and debt ratio should ease concerns by ratings agencies and institutions like the International Monetary Fund about the sustainability of South African fiscal policy, which, in turn, will put less upward pressure on the risk premium on South African government bonds. Lower interest rates on government bonds, due to lower risk premia, imply lower debt service costs, which will free up resources that the government can then allocate to spending on healthcare, education, infrastructure, and so on. This is extremely important, because debt service costs (interest payments) have grown very fast in the past few years, and are expected to grow by more than 10% per year on average over the next three years. These costs already constitute almost 14% of total government spending, and are equal to about 20% of total government revenues.

Risks pertain to government revenue and expenditure

While these public finance developments must be welcomed, there are significant risks that threaten these outcomes. These risks pertain to government revenue and expenditure. The most notable of these risks, which are also discussed in the Budget Speech and Budget Review, are the following:

● The poor financial performance and high debt levels of SOEs and local governments. As in the 2021 MTBPS, the Minister again stated that it is time for ‘tough love’ for poorly performing SOEs. The 2022 Budget Speech also echoes the 2021 MTBPS in calling for the rationalisation or consolidation of some SOEs, depending on a review of their financial sustainability and the value that they create for society. Whether government has the political will to refuse further bailouts to unsustainable SOEs, and whether it will follow through on its plans to rationalise and consolidate some of these enterprises, remains to be seen.

● There are also significant downside risks to Treasury’s GDP growth projections, and therefore its revenue projections, due to uncertainties about the domestic electricity supply, geopolitical tensions, monetary policy tightening in advanced economies due to high inflation, and a possible slowdown in Chinese GDP growth. Treasury already revised its forecast of GDP growth for 2021 downwards to 4.8%, following substantial load shedding by Eskom in the second half of 2021, as well as the violence, destruction and looting that gripped large parts of KwaZulu-Natal and Gauteng in July last year.

● Higher than expected commodity prices, and higher than expected tax collections, leading to another substantial revenue windfall, cannot be expected to last in the long term.

● Given low projected growth, rates of unemployment and poverty cannot be expected to decrease substantially in the near future. These high rates of poverty and unemployment will intensify calls for a further extension of the social relief of distress grant, or, ultimately, the introduction of a basic income grant (BIG). These calls are understandable, because the unemployment rate has trended almost uniformly upward since 2009: the latest available official unemployment rate is almost 35%, the expanded unemployment rate, which includes discouraged workers, is more than 46%, while just more than one in every three working-age adults in South Africa is in paid employment. Furthermore, in his recent State of the Nation address, President Ramaphosa stated that “[i]f there is one thing we all agree on, it is that the present situation – of deep poverty, unemployment and inequality – is unacceptable and unsustainable”, thereby providing further impetus to the movement calling for the provision of income support for working-age people in South Africa. However, it should be noted that a 12-month extension of the social relief of distress grant will already add R44 billion to government spending. Further extensions of this grant, or the introduction of a BIG, will have to be funded by permanent tax increases (or cuts to other expenditure items), as alluded to in the Budget Speech (and as stated by Prof Michael Sachs of Wits University in a recent opinion piece on www.econ3x3.org).

● Projected expenditure paths depend crucially on whether the government can get public servants to agree to very low increases in the overall public sector wage bill. A Public Sector Labour Summit, to be held at the end of March, will provide greater clarity on whether public sector unions will agree to the government's proposals.

● Finally, global interest rates are likely to increase in the near future, to combat persistently high inflation, particularly in advanced economies. Increases in advanced economy interest rates will more than likely be associated with higher domestic interest rates, pushing up already high and fast-growing interest payments and debt service costs.

GDP growth rate much too low to reduce rates of poverty and unemployment

The South African economy needs to grow much faster to combat unemployment and poverty. The Minister stated that “[o]nly through sustained economic growth can South Africa create enough jobs to reduce poverty and inequality; enabling us to reach our goal of a better life for all.”

Unfortunately, GDP growth is projected to average only 1.8% per annum over the next three years. This growth rate is much too low to reduce rates of poverty and unemployment, as Isaah Mhlanga shows in a recent opinion piece at www.econ3x3.org. Government acknowledges the need for much greater investment public and private to spur economic growth. In an effort to stimulate private investment spending, the corporate tax rate was reduced by one percentage point to 27%. Government also set aside more funds for substantial infrastructure investment, which will hopefully ‘crowd in’ private sector investment. The Budget also calls for increased and streamlined public-private partnerships (PPPs) to help finance infrastructure investment, in a nod to the funding constraints that government still faces due to high government debt levels and increasing debt service costs. Finally, the Budget also echoes calls in last year’s MTBPS, as well as the State of the Nation Address, to fast-track structural reforms to speed up economic growth, via the Economic Reconstruction and Recovery Programme. Questions remain about whether these reforms can be implemented soon, and whether these reforms, if implemented, will lead to a substantially higher growth path? National Treasury’s own medium-term growth projections cast doubt about how soon and how large it expects the effects of these reforms to be.

All the right notes, but

This Budget Speech does hit many of the right notes about the need for fiscal sustainability, as well as the need for higher economic growth to alleviate poverty and unemployment. Particularly encouraging are the projected improvements in public finances, as a stable government debt-to-GDP ratio, and lower deficits, which will help to curtail the rapid growth of debt service costs, thereby allowing government to spend more on building and maintaining infrastructure, providing quality public services to South Africans and so on. However, the substantial government revenue windfall of the past few months has again allowed the government to avoid announcing its proposed permanent, explicit solutions to long-term threats to the public finances, such as which SOEs (that are not Eskom) will be targeted for rationalisation and consolidation. It is also concerning that, despite the supposed urgency and importance of curtailing the growth in the public sector wage bill, a summit with public sector employees and unions will only take place at the end of March, leaving great uncertainty about the ability of a government that is losing popular support to extract concessions from one of its largest constituencies.

News Archive

Institutional research culture a precondition for research capacity building and excellence

2004-11-16

A lecture presented by Dr. Andrew M. Kaniki at the University of the Free State Recognition Function for research excellence

16 November 2004
The Vice Chancellor, Prof. Frederick Fourie
Deputy Vice Chancellors, Deans
Awardees
Colleagues and ladies and gentlemen

It is a great pleasure to be here at the University of the Free State. I am particularly honoured to have been invited to present this lecture at the First Annual Recognition Function for Research Excellence to honour researchers who have excelled in their respective fields of expertise. I would like to sincerely thank the office of the Director of Research and Development (Professor Swanepol), and in particular Mr. Aldo Stroebel for facilitating the invitation to this celebration.

I would like to congratulate you (the UFS) for institutionalizing “celebration of research excellence”, which as I will argue in this lecture is one of the key characteristics of institutional research culture that supports research capacity building and sustains research excellence.

Allow me to also take this opportunity to congratulate the University of the Free State for clocking 100 years of existence.

Ahmed Bawa and Johan Mouton (2000) in their chapter entitled Research, in the book: Transformation in higher education: global pressures and local realities in South Africa (ed. N. Cloete et. al Pretoria: CHET. 296-333) have argued that “…the sources of productivity and competitiveness [in the knowledge society and global economy] are increasingly dependent on [quality] knowledge and information being applied to productivity”. The quality knowledge they refer to here is research output or research products and the research process, which (research) as defined by the [OECD] Frascati Manual (2002: 30) is:

“…creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications”

The South African Government has set itself the objective of transforming South Africa into a knowledge society that competes effectively in the global system. A knowledge society requires appropriate numbers of educated and skilled people to create quality new knowledge and to translate the knowledge in innovative ways. To this end a number of policies and strategies like the Human Resource Development [HRD] Strategy for South Africa, the National Plan for Higher Education (NPHE) and the South Africa’s Research and Development [R&D] Strategy, have highlighted human resource development and the concomitant scarce skills development as critical for wealth creation in the context of globalization. The key mission of the HRD Strategy for instance is:

To maximize the potential of the people of South Africa, through the acquisition of knowledge and skills, to work productively and competitively in order to achieve a rising quality of life for all, and to set in place an operational plan, together with the necessary institutional arrangements, to achieve this.

The R&D Strategy emphasizes that maximum effort must be exerted to train the necessary numbers of our people in all fields required for development, running and management of modern economies. Higher education institutions like the University of the Free State have a key role to play in this process, because whatever form or shape a university takes, it is expected to conduct research (quality research); teach (quality teaching – and good graduates); and contribute to the development of its community! Thus the NPHE states that the role of higher education in a knowledge-driven world is threefold:

Human resource development;

High-level skills training and

Production, acquisition and application of knowledge.

Quality research output or knowledge which as argued is critical in determining the degree of competitiveness of a country in the knowledge economy is dependent upon quality research (process). Both the process of producing quality research and its utilization cannot and does not happen in a vacuum. It requires an environment that facilitates the production of new knowledge, its utilization and renewal. It requires skilled persons that can produce new knowledge and facilitate the production of new skills for quality knowledge production. Such an environment or in essence a university must have the culture that supports research activity. Institution research culture (that is a conducive and enabling institutional research culture) is a precondition to research capacity building. Without an institutional research culture that facilitates the development and nurturing of new young researchers it is difficult, if not impossible for a university to effectively and efficiently generate new and more quality researchers. Institutional research culture is also necessary to sustain quality research and quality research output or research excellence. It facilitates the development and sustenance of the institutional and people capacities required to do research produce quality research and generally attain research excellence!

We do recognize that the patterns of information and knowledge seeking, and knowledge generation vary among field or disciplines. For example, we know that in the humanities knowledge workers often work individually, and not as collaboratively as do those of the sciences, they all however, require supportive environments – institutional research culture to achieve and sustain research excellence. An institution does not simply attain a supportive research culture, but as Patricia Clements (English Department, University of Alberta, Edmonton) in her presentation Growing a research culture argues, research culture has to be grown [and maintained]. It unifies all natural and engineering scientists; medical researchers, humanists, and social scientists.

I therefore am of the view that Institutional Research Culture is critical to research capacity building and research excellence. I therefore want to spend a few minutes looking at the characteristics of research culture. To be effective, institutional research culture has grown and sustained not only at the institutional level, but also at the faculty, school and departmental levels of any university.

What is Research Culture?

In the process of researching on institutional research culture I identified several characteristics. Many of these overlap in some way. I want to deal with some of these characteristics; some in a little more detail while others simply cursorily. In the process what we should be asking ourselves is the extent to which an institution, like the University of the Free State, and its faculties, individually and severally, is growing and or sustaining this culture.

Institutional Research Strategy: As a plan of action or guide for a course of action, the institutional research strategy must spell out research goals that a university wants to achieve. It must be a prescription of what the university needs to be done with respect to research. As a strategy it is neither an independent activity nor an end in itself, but a component part and operationalization of the university policy or mission. ( Related to this is the Establishment of Institutional research policies)

Includes and makes public the targets, e.g. achieve so many rated scientists and make sure that every year we have so many SAPSE publications. That way people keep an eye on research agendas of the university and nation.

The UFS is obviously on its way, having launched its own Research strategy (A Strategic framework for the development of research at the University of the Free Sate. August 2003). Note that this strategy refers specifically to the “Culture of research” Fig 1

A set of administrative practices to support and encourage research. Patricia Clements (English Department, University of Alberta, Edmonton) in her presentation Growing a research culture argues that that research activity and output within the her Faculty (Arts) were very low and, in spite of the numbers of staff, with no Associate Dean for Research in the Faculty as though they had accepted that research belonged to Medicine and Science and Engineering, and teaching, separated from inquiry, belonged to the Arts. With the change in the thinking about research and development of research culture, it became clear that there was a major role for research support in a faculty her size (now about 360 full time continuing academic staff). The faculty developed a support system for research and began to address the SSHRC issues.

Reduce the bureaucracy system and micromanagement of research! This however, also implies that there is capacity and policies and procedure to manage and guide research processes

Establishment of Intellectual Property regulations and assistance

Research ethics policy and safeguarding by research administration

Focused, applied and suitable nature of the delivery mode (an institution open to new methodologies for conducting research

Programmes suited both full and part-time study particularly at graduate level (Mainly at Faculty/school and department level, and depending on what’s manageable)

Hiring senior academics to engage in, teach on and supervise postgraduate students to facilitate exchange of and transfer ideas and most importantly mentorship especially in view of declining numbers of researchers in particular fields

Quality instruction and facilitation in learning about research processes

A high retention rate of students maintained by the supportive and challenging learning environment and the use of online facilities to support collaboration and in-class learning

Availability of research grants: and awareness of sourcing funds from external sources like the National Research Foundation; Water Research Commission; Medical Research Council, private philanthropies and others outside the country. For example an institution should be able to assess how much of the slice the available funds (NRF etc) its able acquire and possibly top slice from institutional budget.

Adequacy of the financial reward system to encourage university staff members to do research (General Celebration of achievement for research excellence and achievement. This ranges form Annual reports mention; celebratory dinner. At Alberta researchers were given lapels. I don’t know of any academic who do not feel a sense of achievement to get into print or recognised. Access to research facilities within and outside the institution

Provision of infrastructure to support university-based research (e.g. equipment, admin support, etc.) – but also awareness of publicly funded and available research facilities and equipment!

Internet connectivity and changes in the bandwidth of the internet to download articles

Subscription to related bodies by the library so that researcher can download articles

Facilities and resources to attend international conferences to keep one updated

Number of visiting professors/speakers targeting senior scholars and invite them to lunch to ask them to participate and to encourage their best graduate students to do so within the institution and across institutions

Research training seminars for research students including young academics

Participation of staff/students in delivering research papers to national and international conferences

Establishment of research groups to provide interaction frameworks to achieve critical mass of research-active staff

Facilitation for more research time: Targeting new scholars and giving them reduced teaching loads in their first year or two for the purpose of developing their research programs. For the purpose of helping new colleagues to see the shape of South African research support, personalizing it, and creating research community

Take research to the community and argue its necessity, and utility

And, finally celebrating excellence. We must recognize achievement - parties and public recognition for colleagues who achieve splendid things in their research.

In conclusion, I want to reemphasize that research culture has to be grown it does not simply exist in an institution. If it is grown it needs to be nourished, nurtured and sustained. An institution cannot simply leave on borrowed reputation and expect to remain research excellent. It is on this basis that instruments like the National Research Foundation rating system recognizes excellence within a given period of time and not necessarily for a life time! This it is believed encourages continued research excellence.

THANK YOU and best wishes

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