Treasury not only has a plan to rein in the budget deficit and the determination to carry it out, it is also boldly proposing that SA chart a new growth path that creates more jobs.
The 2010 budget is unflinching in facing up to SA's economic shortcomings, the prime one being that the existing growth path is not going to generate sufficient jobs.
The budget message is that reducing unemployment in the long term will require stronger economic growth as well as a growth path that is more labour-absorbing.
Big day Pravin Gordhan, Lesetja Kganyago and Oupa Magashula
The moderate recovery outlined in the budget forecast, where growth averages 3,6%, is expected to create just over 1m jobs over the next five years. However, with an expanding potential labour force, this would mean only a marginal decline in unemployment. Growth of 6% a year would create an additional 1m jobs.
Part of the answer is better education and training. In the short term, urgent measures are needed to tackle unemployment, especially among young people - hence the proposal for a wage subsidy to make it more attractive for employers to hire inexperienced job-seekers.
However, employment expert Miriam Altman, of the Human Sciences Research Council, warns that labour-market interventions seldom work unless very well designed. She doesn't believe that firms are failing to hire school-leavers because wages are too high but because they lack the most basic workplace skills. "Any programme that improves elocution and communication skills will make a difference," she says.
"Our message is that we will not go out and borrow to compensate for unbudgeted overruns in the wage bill" - MATTHEW SIMMONDS
In this budget, job creation will be stimulated by supporting industries and services that have significant job-creating potential, expanding the public works programme, encouraging small business development and entrepreneurship, maintaining the pace of the R845bn infrastructural programme, and pouring additional resources into education and training.
But even as it charts a new growth path, the budget is a clear affirmation of SA's existing fiscal and monetary approach. These sound policies ensured that SA was well prepared when the global crisis hit and will be maintained, says the very first page of the Budget review.
Most striking is Gordhan's move in getting new Reserve Bank governor Gill Marcus to attend the pre-budget press conference. Together they presented a united front in defending the status quo.
Their message was clear: all countries target a low, stable inflation rate to reduce the long-term cost of borrowing and create confidence in the future. This is necessary to stimulate investment, employment and competitiveness. Low inflation is equally important to protect the living standards of workers and the poor.
So inflation targeting will remain; the target band will not be widened from 3%-6%; and the Bank's mandate will not be broadened to make the maximisation of growth an explicit goal along with the current goal of keeping inflation low and stable.
The duo made it clear that while they welcome ongoing discussion and that this was not their final word on the matter, credible monetary policy was essential for SA to achieve faster growth.
"We have a profound commitment to engage but it is very important that there is clarity and consistency about where our policy stands," said Gordhan. He presented a letter he had written to Marcus which spells out for the first time what the treasury expects from the Bank: monetary policy must be conducted in a flexible manner and if, in the event of external shocks, inflation should exceed the target band, the Bank should be careful in bringing it back down to "avoid unnecessary instability in output and interest rates".
The markets were also expecting Gordhan to clarify government's position on the rand.
Though he says government wants a stable and competitive exchange rate, and is considering all available instruments, "it was very clear that there was nothing else the Bank needed to do for now".
He says in the budget that the Bank will continue its existing policy of "leaning against the wind" to counter the volatility of the rand through various means, including reserve accumulation and further reform of exchange controls.
"There was fear that this budget would represent a shift to the left," says Efficient Group economist Dawie Roodt. "It certainly does not. I would call it a conservative budget in that there were no changes to inflation targeting, no Tobin tax [a tax on speculative capital inflows], no increase in corporate taxes and no move on the currency. But then why rock the boat when you're in troubled waters?"
When it comes to balancing the numbers, the 2010 budget manages to construct a plausible equilibrium. The problem is that government's fiscal consolidation plan works only if the economy delivers a protracted economic upswing through to 2015.
Treasury's GDP growth forecast has been upwardly revised to 2,3% this year (from 1,5% previously), climbing to 3,6% by 2012. However, government is relying on revenue growth in excess of GDP growth. This implies a broadening in the tax base and additional taxes.
The budget doesn't raise the overall tax burden this year for fear of choking off the recovery, but sets out new measures to wring every cent out of the existing tax purse and to broaden the tax base.
To maintain fiscal stability, the state has drawn more and more resources from the private sector over the past 10 years. In 2000/2001, the ratio of revenue to GDP was 23%. By 2013 it will be 28%.
But this ratio can't be increased indefinitely, warns Sanlam Investment Management economist Arthur Kamp: "The budget is an indication that the economy is not delivering. That's why we need all these job-creation and industrial incentives. But if you can fund these things only by further taxing the private sector, you're taxing the economy's ability to grow."
Treasury recognises that revenue growth will be insufficient to reduce the R177,7bn deficit (7,3% of GDP in 2009/2010) that has developed as a result of the recession. Expenditure will have to be reined in drastically.
The deficit is the result of a R69bn revenue shortfall (mainly because Vat and corporate taxes underperformed) at a time when government expenditure exploded by 17%.
SA's budget balance has swung from a surplus of 1% in 2007/2008 to a deficit of 7,3% in just two years. The last time SA's fiscal deficit was this large was during the political tumult of the early 1990s.
But given the global context, what matters is not so much the size of the deficit in this fiscal year, but whether SA is able to put forward a credible consolidation plan outlining how it will get public finances back on a sound footing.
To get the deficit down to a level the markets will accept, real growth in noninterest public expenditure must be cut to 1% a year, compared to 7,2% in the four years up to 2008/2009.
This is a tough call at a time when unrealistic spending demands, like the proposed national health insurance plan, are being punted by a new crop of naive politicians. Against this backdrop, are expenditure reductions of this magnitude really plausible?
"It will take enormous political will, while treasury will have to work very hard to sensitise the political marketplace," a treasury chief director, Matthew Simmonds, conceded in the budget lockup.
But treasury DG Lesetja Kganyago says this steep reduction in expenditure is not unrealistic, pointing to the R25bn in savings that have been found over the past year as well as the intense campaign to rationalise public spending and reduce wastage and corruption that will be waged by treasury and the presidency over the next few years.
Kamp is not convinced. He says success will depend heavily on treasury's ability to restrain government's annual wage bill increase to an average of 7% since it accounts for a third of total noninterest spending.
Treasury intends to play hardball, according to Simmonds. "Our message is that we will not go out and borrow to compensate for unbudgeted overruns in the wage bill," he says.
"If the wage bill is in excess of budgeted amounts we will have to reduce spending on other goods and services and/or moderate employment growth in the public sector."
Government doesn't have a choice. It must rein in the deficit because the only way to finance it is through borrowing - and borrowing is costly.
Government's debt ratio is set to climb from 22% of GDP now to 40% by 2012/2013. Treasury estimates that debt will peak at 44% of GDP in 2015/2016, assuming the economy grows by about 3,5% on average over that period.
While higher deficits and lower economic growth could push debt above 48% of GDP, there is less than a 7% chance that debt will exceed 53% of GDP in 2015/2016, it says.
However, if contingent liabilities are included (like government's loan guarantees to Eskom), treasury estimates that public debt should peak at about 60% over the medium term, declining thereafter.
These are scary numbers. Of particular concern is the sharp jump in the public-sector borrowing requirement, which includes state-owned enterprises. It remains exceptionally high at 11,1% of GDP in 2010/2011 and declines, but only to 7,1%, by 2012/2013. In 2008/2009 it was 3,8%.
The cost of higher borrowing is, of course, greater expenditure on interest repayments.
WHAT IT MEANS
 Economic weaknesses faced head-on
Debt growth could undermine strategy
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Perhaps the most shocking number in the budget is the revelation that interest charges on debt are now the fastest- growing item of state expenditure. These are set to rocket by 22% annually on average over the next three years.
This will reverse the favourable trend of the past decade, when lower debt-servicing costs freed up resources for expenditure elsewhere. Now SA must borrow to pay interest on its debt.
By 2012/2013 SA will be spending about R104bn on interest payments alone. That's more than 10% of the total spending envelope in that year.
"SA's saving grace is its low gross debt ratio of 32,5 % of GDP, which has created significant fiscal space, enabling it to act in support of real economic activity until the private sector regains momentum," says Kamp.
However, the available leeway is not limitless. "Government is relying on an extended economic upswing beyond three years that delivers firm growth. That is possible, but not guaranteed," he says.
"A downturn in the economy against a backdrop of a debt ratio expanding towards 50% of GDP would put long-run fiscal sustainability at risk."
