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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

Questions about racial integration in residences answered

2007-07-31

Answers to frequently asked questions about the racial integration of student residences at the UFS

1. Why does the UFS want to change the current situation in the student residences?

There are many reasons why a new approach to placement in the student residences is necessary. However, the main reason is of an educational nature. As a university, the UFS should create an environment in its residences where students can learn to appreciate and respect the rich diversity that is on offer at the university. A university accommodates students from many different backgrounds in terms of race, language, religion, economic status, culture and other aspects. If a student can learn to appreciate the value in this rich diversity at university, he or she will also be able to appreciate the value of this diversity in the workplace and broader society.

The current situation of predominantly white and predominantly black residences has not been able to cultivate such an appreciation for diversity and respect for one another as human beings, and will not equip students with the knowledge and skills required to manage diversity.

Besides this, there are many other areas of life in the residences that need attention. For one, we need to urgently establish a human rights culture in the residences so that the rights of all students can be respected. We need to address the abuse of alcohol, provide disabled students with their rightful place, and last but not least, really entrench a culture of learning in student residences.

Let us make the residences places we can be proud of – places of learning, of diversity, of respect; places of growth and development. This is the ideal we should all strive to achieve.

2. Why does the management want to force us to integrate?

It is a false argument to debate the issue in terms of “force”. Any decision by a University, or any other organisation, regarding matters of policy, rules and regulations implies a restriction on the choice of an individual and an obligation to comply. What we should focus on is whether this decision of the Council is in the best interests of our students.

The management of the university believes that it has a responsibility to give students the best education possible, not only in terms of what you learn in the lecture rooms, but especially in the residences as well. The residences can be very powerful places of learning about matters of great importance, both academic and non-academic.

The parallel-medium language policy separates students into largely white/Afrikaans and black/English classes. Efforts are being made to bridge this divide in the classroom, but we can also try to eliminate it in the residences.

The university is committed to building a new culture for the entire institution that is based on values and principles – such as an academic culture, non-racialism, respect for human rights and diversity – among staff and students.

In the context of student residences, the application of these values and principles still allows substantial room for the voluntary exercising of choice by individuals as well as by Residence Committees, notably with regard to the placement of students (they can still place 50 percent of first-year students), as well as the determination of the future character and traditions of a diverse residence.

Furthermore, students can still choose their residences (subject to availability of places), can choose a roommate, and so forth.

3. What about freedom of association?

The rights we enjoy in a democracy must be balanced against other rights, as well as the laws of the country. This means that the right to freedom of association must be balanced against laws that make it illegal to discriminate against other people on the basis of race, language or religion, for instance.

Freedom of association pertains to the right of individuals to form voluntary organisations such as clubs or private boarding houses, or their right to join or not join existing organisations. You exercise that right when you decide to become a student of the UFS, and again when you choose to live in one of its residences.

However, once you have decided to join an organisation voluntarily, you cannot subsequently demand that that organisation should provide a “club” or residence to your liking where, for instance, you only associate with your choice of co-members. You must accept the policies of that organisation.

In any case, how would that right of yours be balanced against the right of another individual who wishes to associate with a different set of co-members? (For instance – what about the freedom of a student to associate with students NOT from his own background, but indeed from another language, cultural, racial or economic background?)

The constitutional right to freedom of association can, in any case, not be used to exclude or discriminate on the basis of race or religion (Section 18 of the Bill of Rights).

Besides, the new policy guidelines will still make provision for freedom of association. This right can be exercised freely within a diverse residence with regard to friendships, joint academic work, socialising, sport, etc.

4. Will residences not lose their traditions?

The University appreciates that there are many valuable elements of tradition in residences. However, we must bear in mind that the traditions and character of student residences have evolved and changed over time, and they will continue to evolve and to change. In addition, we do not need to accept all aspects of residence life purely on the basis of tradition, including the unacceptably high level of alcohol abuse and unsavoury, humiliating and discriminatory orientation practices. The new approach to integrated residences provides the opportunity to retain the positive aspects of the current traditions and character, but also to develop new traditions and give residences a new character.

We can now establish a tradition and a character for each residence that are reconcilable with the values of the University as a place of scholarship and are aligned with the human rights approach of our country’s Constitution, the laws of our country and the strengths and diversity of the students in a particular residence.

5. Have students been involved in this process? Is there a role for them to play after the decision has been taken by the Council of the UFS?

In the first semester of 2007, during two rounds of consultations, the primes, SRC and student organisations were consulted about the proposed new placement policy to increase diversity in residences. Some residences also made written submissions on the matter (such as Madelief, Soetdoring, Wag-'n-bietjie, Vergeet-my-nie, Emily Hobhouse). Other residences requested and were granted more time, but did not make any submissions in the end (such as Reitz and Armentum).

Management also had several meetings with the above-mentioned structures to hear first-hand from students their concerns and solutions regarding possible challenges presented by integration in residences.

During these interactions, several excellent ideas and proposals were put forward by students. These views had a definite impact on the eventual proposal that was taken to the University Council, in particular regarding the minimum level of diversity (30%) in junior residences and the fact that residences still want to have a say in the placement of students, rather than the placement decision being left in the hands of Management alone (hence the 50% placement portion of residences). Management values the effort that was put into the process by the primes and residence committees, and thanks them for their contributions.

However, it should be stressed that consultation should not be understood as a process of negotiation, nor does it imply that consensus must be reached. What it means is that Management must take a considered decision after hearing the views of stakeholders.

Management would like students to continue to provide input and ideas regarding the implementation details of the policy guidelines. Task teams have been established and students will be informed about how they can interact with the task teams on an ongoing basis.

6. But integration in the residences was tried in the past (in the late 1990s), and then it failed. Why will it work now?

Yes, the University of the Free State did integrate its residences as far back as 1993, and for a few years it worked. The UFS did it at that time and is now doing so again, because it is the right thing to do. Yet it is important to understand why the previous attempt at racial integration in residences was not successful.

Firstly, both black and white students were much polarised because of the apartheid past. Secondly, there was insufficient management support for students in the residences, the student leaders generally as well as residence heads, in terms of dealing with diversity and related issues. Thirdly, the institutional culture of the UFS and the residences in particular was not addressed as part of broader transformation and integration in residences, whereas it is now being addressed.

In addition, the current decision to integrate residences has the benefit of being implemented after several more years of integration in schooling, sport, workplaces and other aspects of life.

This decision is also based on Management’s commitment to give all the possible support it can to this process.

This is a very important initiative that the UFS is undertaking. Management, in co-operation with students, must ensure that it succeeds. Integrated residences that produce high-quality graduates equipped to deal with the challenges of the workplace and our society is a worthwhile ideal we should all strive to achieve.

If you would like to make a proposal regarding the implementation and practical aspects of the new policy, please send it to the following email address: rector@ufs.ac.za

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