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Zuma’s battle with Treasury to spook investors

Zuma’s battle with Treasury to spook investors

Jacob Zuma’s sudden interest in making tertiary education free for all students has dealt a blow to South Africa’s economy – before any change in policy has even been announced. The rand plummeted to a 16-month low after rumours of the policy shift emerged last week, while one of the Treasury’s most senior officials resigned in protest at the president’s interference in the budget process. The fiasco comes at the worst possible time, with a decision on the downgrade of rand-denominated debt just weeks away.

Abolishing fees altogether would increase the country’s budget deficit by around 20%, unless the government raises taxes or makes major spending cuts to other programmes. Such a radical measure therefore seems entirely impractical given the current fiscal reality, as was made clear by a government-commissioned report released on Monday. If Zuma does scrap fees, he will further undermine investor confidence and leave another major headache for his successor.

The Presidency versus the Treasury

Funding is the biggest obstacle to abolishing university fees. Finance minister Malusi Gigaba made it clear in last month’s medium-term budget, that with the fiscal deficit running at 4.3% of GDP, any new spending projects will have to be financed through cuts elsewhere. In theory, taxes could be increased, but the Treasury opposes this solution because it would be likely to constrain economic growth.

Meanwhile, the Treasury’s budget director Michael Sachs has resigned in protest at how Zuma has bypassed the usual budget channels and ignored the Treasury’s insistence on fiscal restraint. The Treasury is widely respected as a technically competent institution, and Zuma’s moves to undermine its control of public finances will be a red flag for credit ratings agencies. A downgrade of rand-denominated debt to junk status was already highly likely, and is now virtually certain.

The real financial cost of abolishing fees is highly uncertain, not least because it is difficult to predict how free access will affect student numbers. Reports suggest Zuma is looking for ZAR40 billion (USD2.8 billion) to fund the policy. Even assuming that this conservative estimate is sufficient, the extra annual cost would be equivalent to around 2.5% of total public spending. The policy would require more money than the government spends on several priority areas, including agriculture.

A pre-election stunt

Zuma’s move is most probably a ploy designed to benefit Nkosazana Dlamini-Zuma, his preferred successor, ahead of next month’s vote to choose the next ANC leader. By endorsing the populist policy, she will be able to clearly differentiate herself from Cyril Ramaphosa and boost her popularity among young voters. In particular, she will gain momentum by attracting supporters of last year’s student-led ‘FeesMustFall’ campaign.

The danger is that Ramaphosa, who generally maintains a more pragmatic fiscal outlook, might also commit to free education to avoid being outflanked. If he does so, it is almost certain that the next ANC president would be tied to a policy that would generate fiscal chaos. It is of course possible that either Ramaphosa or Dlamini-Zuma would backtrack once in office, but doing so would be problematic politically.

Slashing fees misses the point

There is no doubt that the failure to expand the skills base of the workforce is seriously damaging South Africa’s attractiveness as an investment destination. But abolishing fees altogether for tertiary education would do little to solve the problem. Students from the lowest income brackets already receive subsidies. If these grants were to expand so that current recipients paid no fees, the cost would be far lower, if still significant, at around ZAR11 billion in 2018 (USD770 million).

A far larger problem is the often abysmal quality of basic education. Such poor standards mean that few school-leavers are capable of entering university (regardless of whether or not fees are charged). If Zuma goes ahead with his promise to abolish fees, he will be doing little to solve one of the biggest factors in undermining the country’s competitiveness. Moreover, he will leave an expensive legacy for his successor and aggravate an already deteriorating fiscal situation.

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