South Africa's prudent fiscal plans may irk unions

South Africa's Finance Minister Pravin Gordhan on Tuesday outlined a fiscal path that will assure investors and keep credit ratings safe, but his plans to control non-investment spending may annoy leftist allies of the ruling ANC party. Since becoming Finance Minister in 2009, Gordhan has stuck to the policies of the previous government that helped raise South Africa's credit ratings but drove a wedge between the Treasury and the ANC'S union and communist allies.
So far, Gordhan has not faced pressure to spend the country out of a economic slowdown. Tuesday's budget statement shows that he has President Zuma's support to keep spending in check. Gordhan inherited a very small budget deficit that gave him space to raise spending to offset a global crisis that saw South Africa suffer its first recession in almost two decades in 2009.
An ongoing crisis in the eurozone and a credit downgrade of US debt have dashed hopes that the economic recovery would pick up pace and with revenues still sluggish, he has had to pick and choose his spending priorities. He has opted for investment spending with plans to limit expenditure in other areas and speaking strongly against the state wage bill that "needs careful attention". Here are a few implications of the medium term budget statement:
---- While South Africa sees slightly wider budget deficits than those forecast in February, it will not raised its international borrowing plans but will tweak its funding strategy by using switch auctions and drawing from its cash balances. This will keep its ratings safe and maintain the decent demand that South African bonds have enjoyed even from offshore investors.
Investors are likely to breathe a sigh of relief that Gordhan has plans to keep borrowing and spending in check. The fear was that after over a million job losses since 2009's recession, social spending might increase.
---- Leftist allies of the ruling party will not be happy with Gordhan's plans to see a "positive primary balance" by 2015, arguing that the money could be used instead to ease the plight of the poor.
---- Gordhan has budgeted for wage increases of 5 percent for state workers. Such a plan could infuriate unions that are used to demanding and settling wage deals at above-inflation rates. CPI is seen averaging 5.0 percent this year and 5.4 percent in 2012. He wants salaries of "all role players" to be given careful attention, including those of senior managers at state-owned enterprises. This could temper criticism that he is pandering to business-types at the expense of the working class.
---- The ruling African National Congress' relationship with union ally COSATU is already strained partly because the labour federation feels Zuma's administration has not loosened fiscal and monetary policy enough.
The fiscally-conservative budget outline will raise the heckles of militant unionists in the ruling alliance ahead of the ANC's elective conference next year and may be used to garner leftist support against Zuma.
---- The left-leaning allies of the African National Congress will not be happy with his plans to limit spending, especially if this would lead to government being stingy with handing out welfare and housing.
More than 15 million people - about a third of the population - receive some kind of state support and unions want to retain this safety net and will watch any planned changes to this. For now, there are no signs this may be reviewed.
---- Gordhan plans to spend 25 billion rand over the next six years to boost industry and small businesses. This move will be well-received by business but unions will want to see jobs created instead of companies using the funds to boost profitability before celebrating.
---- There were no details about the cost of the planned National Health Insurance although the Treasury said pilot projects at 10 districts across the country would start in 2012.