Finance Minister Pravin Gordhan reaffirmed government’s commitment to the 20-year National Development Plan (NDP) in his 2014 Budget, while appealing for social partners to work together to “radically change” the economy by embracing structural reforms to accelerate growth.

Speaking a day after it was confirmed that the South African economy had expanded by only 1.9% in 2013 – yet another strike-afflicted year – Gordhan forecast that the gross domestic product (GDP) would expand by only 2.7% in 2014.

The forecast was more or less in line with the International Monetary Fund’s 2.8% projection for the year, but higher than a number of private- sector forecasts, with economists particularly concerned about the supply-side constraints posed by labour-market unrest and the country’s electricity and transport bottlenecks.

Nevertheless, the National Treasury’s new forecast remained well off the NDP’s 5.4% yearly growth aspiration to 2030 and represented a downward revision from the 3% outlined in the October mini Budget – the growth outlook was maintained at 3.2% and 3.5% for 2015 and 2016 respectively.

The 2013 GDP performance represented the third year of decline, with growth falling from 3.6% in 2011 and 2.5% in 2012 to the 1.9% level. The Budget Review, which accompanied the Budget speech, described the pace of growth as “moderate” and acknowledged that the economy was performing below potential.

Despite slower economic growth, the 2013/14 Budget deficit was projected to be 4% of GDP, a modest improvement on the October projection of 4.2%.

Gordhan stressed that expenditure had been reprioritised to ensure that it remained within the overall ceiling set in the October Medium Term Budget Policy Statement. It was also announced that the deficit for 2014/15 should be contained at 4%, which would translate into expenditure of R1.25-trillion against revenue of R1.1-trillion. The deficit was expected to fall to 3.6% and 2.8% in 2015/16 and 2016/17 respectively.

The ceiling commits government to spending limits of R1.03-trillion in 2014/15, R1.11-trillion in 2015/16 and R1.18-trillion in 2016/17. Excluding interest payments, real spending is set to grow at an annual average of 1.8% over the three-year period. Net debt would stabilise at about 45% of GDP in 2016/17.
Gordhan said the focus was, over the longer term, on rebuilding the fiscal space to enable gov- ernment to support business growth and extend a social wage to the country’s most vulnerable citizens. However, more immediately, fiscal consoli- dation would be pursued to reduce the deficit, while sustaining the social-wage component at 57% of overall expenditure during 2014/15.

The Minister said the emphasis would shift from government spending to sustain growth to facilitating a growth cycle led by the private sector – a process that would require a social compact between government, business and labour that was supportive of job-creating investment.

“We have to work together to radically change our economy,” Gordhan told lawmakers, while stressing the need for NDP “action and implementation”.

But he also said the new economic order could not just be a “pact amongst elites, a coalition amongst stakeholders with vested interests – nor can it be built on populist slogans or unrealistic promises”.

“Our history tells us that progress has to be built on a vision and strategy shared by leaders and the people – a vision founded on realism and evidence,” the Minister stressed.

The Budget Review also highlighted the need for a social compact to reduce poverty and inequality and raise employment and investment as a “critical” NDP action. “Building on formal social accords and consultation related to the mining sector, social cohesion, industrial devel- opment and youth employment, government will continue to develop active partnerships with business, labour and civil society.”

However, the address was presented at a time of another protracted strike in the platinum sector and persistent unhappiness among some sections of the labour movement with the NDP and its proposed economic remedies. The National Union of Metalworkers had been parti- cularly vocal in its opposition to the plan.

“The labour relations environment needs more stability,” Gordhan said, while underlining partnership as a central theme of the NDP.

But he also pointed to recent academic research that had shown that South Africa was less strike afflicted than a number of other emerging markets and far less than the “prevailing narrative” would suggest. South African Reserve Bank governor Gill Marcus, who attended a Budget briefing alongside the Minister, highlighted that 2013 settlements had been 7.9% on average, which was “above what we would have liked”, but well below the initial demands.

Nevertheless, Gordhan said a “new spirit” and “bold leadership” were required from all stakeholders to forge, in the coming two years, a social compact that would put the country and the economy ahead of immediate vested interests. Progress would hinge on the willingness of participants to compromise, failing which the environment could descend into “conflictual arrangements”.

Immediate actions outlined in the R1.25-trillion Budget to promote growth included billions for manufacturing and agricultural incentives, continued investment in economic infrastructure, as well as plans to open the way for the exploration of shale gas.

The focus on manufacturing support was geared towards improving the competitiveness of a sector that had the potential to take advantage of both a recovery in developed markets and the weaker rand.

Besides mining, an increase in exports from industry is viewed as critical to dealing with South Africa’s elevated current account deficit, which widened to 6.8% in the third quarter of 2013, as the trade deficit grew. The current account deficit is projected to narrow from 6.1% in 2013 to 5.5% in 2016 as export growth improves.

However, participants in the productive sectors of the economy were also concerned about the effect steeply rising power and other administrative costs were having on their competitiveness.

Gordhan acknowledged that fiscal and monetary choices should be directed towards keeping inflation low and maintaining the recent gains in competitiveness. He added that, over the medium term, business support programmes and special economic zones would be supported to boost industrialisation and improve local competitiveness.

Marcus added that the weaker rand should offer an important stimulus to exporters, as well as opportunities for import substitution, adding that the flexible currency was playing its role as a “shock absorber”. However, she acknowledged that the weakening of the rand also posed inflationary risks.