Johannesburg – South Africa’s economic growth forecasts have been revised upwards, but there’s still not much to get excited about.

That’s why the numbers in Finance Minister Pravin Gordhan’s medium-term budget policy statement on Wednesday are likely to focus on fiscal constraint and sustainability.

However, he’ll offset the economic reality with a speech aimed at countering the numbers and the potential they have to fuel economic policy tensions in the ANC-led tripartite alliance.

But trade federation Cosatu has prepared itself for vintage ANC prudence in the October mini budget. Cosatu economist Professor Chris Malikane says the labour federation is used to government’s tricks of promising to translate Cosatu’s views into policy but never actually doing so.

Said Malikane: “This is extremely frustrating. It makes a mockery of the alliance partners who are used to mobilising voters but afterwards they must know their place (in policy making). Our government has a complete lack of confidence in local voices when it comes to economic matters.”

Malikane says the truth is it’s the International Monetary Fund (IMF) and World Bank that make policy in South Africa. For example, when Cosatu lobbies for lower interest rates, there’s an automatic rejection. But a few months later, when the IMF says it’s a good idea, the government listens.

Although Gordhan told the IMF in Washington earlier this month that South Africa’s macroeconomic policy is being reviewed to ensure more labour-absorbing growth, Malikane said that’s nothing more than words to “paper over the cracks of failed policy”.

Tensions mount

As Cosatu flexes its muscle ahead of the 2011 municipal elections and 2012 ANC elective conference – and warns it will no longer be lulled into silence with government lip service – tensions are aggravated by the fact that President Jacob Zuma was swept to power by Cosatu on the back of promises to overhaul South Africa’s economy using what Cosatu assumed would be more labour-influenced policies.

That situation is complicated further by what Investment Solutions’ Chris Hart calls an “acrimonious limbo”. Zuma may have made it clear the ANC is the centre of power and policy making, but there’s still uncertainty – if not paralysis – about economic planning and responsibilities.

Eighteen months into the new term, there’s still no sight of the promised labour-absorbing growth path from Economic Development Minister Ebrahim Patel. There’s no proper clarity about who in cabinet is responsible for what part of economic policy and how various ministers, planning bodies and panels of experts in that area should be interacting.

It’s this political context – which is also underpinned by a leadership battle in the ANC – in which Gordhan will craft his medium-term budget.

The global economic context has given him a bit of room to manoeuvre. The strong rand has contributed to government’s deficit closing more quickly than expected, and tax revenue is slightly higher than anticipated (but still nowhere near pre-recession highs of 2008).

Nevertheless, that doesn’t mean Gordhan has cash bonanzas to hand out. All it means is that he’ll have to borrow less than expected, said Idasa economist Len Verwey.

The Organisation for Economic Cooperation and Development reports actual output of South Africa’s economy will be aligned with potential by 2012.

While the IMF has upgraded global economic growth for next year, it’s downgraded it for the following year – which adds to uncertainty. And even if it’s pegged growth for sub-Saharan Africa at 5%, it expects SA to grow between 3% and 4%.

That isn’t enough to tackle unemployment and the reality is South Africa, even with predicted growth levels, is likely to still have a debt ratio of 40% to gross domestic product by 2013/2014.

Gordhan’s plea will be to do much more with less. Although government is talking of macroeconomic reviews to facilitate the 6.5% growth required for upscaling job creation, Verwey said growth will only be possible once South Africa’s economy has recovered.

Prudence will have to be the operative word for now, especially if Gordhan is going to create space for programmes such as the R376bn national health insurance (NHI).

The burning issue of NHI

One thing Cosatu is expecting Gordhan to do in his mini budget is describe where initial tranches of NHI cash is going to come from ahead of 2012, when implementation begins. Gordhan is unlikely to oblige.

Treasury hasn’t yet put a cost on the NHI and cabinet hasn’t approved it. However, to appease the politics at play, Gordhan is likely to give some kind of signal it’s on Treasury’s mind. He may even give a more tangible signal by now removing the tax exemption for private medical aid.

“It (the NHI) is a very noble cause but the bottom line is that more on health means less in other areas of government spending,” says Hart.

That’s precisely why Gordhan is expected to tackle wasteful and corrupt expenditure, and why he’s likely to use the cash-strapped situation to motivate for limitations on the public sector wage bill.

Investec’s Professor Brian Kantor says the trickiest part of Gordhan’s mini budget will be limiting the “blackmail power” of the public sector.

In February’s budget speech, Gordhan was clear about how 2009 salary increases had placed “immense pressure” on South Africa’s fiscus.

He called for moderated 2010 increases to ensure there were enough funds for other government services. Public sector unions didn’t take Gordhan seriously at all. Although trade unions suspended their three-week strike in September, most have yet to accept government’s offer of a 7.5% pay rise and R800 housing subsidy.

Teachers and nursed officially rejected it, and further strike action looks imminent.

SA Reserve Bank figures show a public sector wage bill that’s increased by an average 6.5% above inflation for eight years.

In that context, said Verwey, it’s critical to ask what’s being given up in terms of public spending when that kind of pressure is put on the fiscus without being matched by productivity. “Gordhan’s going to have to insist on some kind of wage restraint,” said Verwey.

While the jury is out as to whether Gordhan’s insistence on restraint will get the support it needs from Zuma, government has helped create this monster. Over the past 16 years, party loyalty has trumped skills when filling critical posts and it’s consistently failed to manage or hold the public service to account.

As Malikane argued, the recent public sector strike wasn’t so much about wages as living/working conditions, where workers still spend 30% of their wage on transport to and from work and where 36% of government schools still don’t have toilets – despite government’s budget allocating more to education than anything else.

While Cosatu fails to acknowledge how it contributes to that situation by extending protection to mediocrity, it has a point when it asks how nurses and teachers can be paid so little when a plethora of non-essential, often non-performing, middle and senior managers take home very substantial pay.

Public Service and Administration Minister Richard Baloyi agrees something has to be done to overhaul the public service. Although the problems are well documented, Baloyi wants a task team to investigate. He has yet to appoint one – which means nothing is likely to change during his term of office.

Ultimately, Gordhan’s push to take decisions that will stand government, the economy and job creation in good stead when South Africa’s economy recovers it doesn’t look as if it can count on much political backbone from his boss or cabinet.

article courtesy of Finweek – click here for the original article