Budget speech a damp squib for SMEs

Finance Minister Pravin Gordhan resisted calls from Minister of Small Business Development Lindiwe Zulu for more money in his budget speech delivered in the National Assembly today.

What some media outlets described as a "windfall" budget of R3,9 billion over three years is in fact a near exact repeat of what he announced in the Medium Term Budget Policy Statement in October last year.

On page 64 of Treasury's Budget Review, published today, mention is made of support for 5 000 informal small businesses and cooperatives (through the National Informal Business Upliftment Strategy, not mentioned by name), and for 2 000 SMMEs through the Black Business Supplier Development Programme.

These numbers barely scratch the surface while millions of small business owners struggle in an unfriendly business environment of restrictive labour regulations, suffocating red tape, late payments by customers and a sluggish economy.

At the end of his speech he refers to the establishment of  "a fund to support small and medium enterprises" but omits to explain why government has reneged on its commitment made in February 2016 to match private sector money raised. Of course the answer is this: government either does not have the money, or is leaving it to the private sector to prove it can leverage its own money to boost fast-growing small businesses to create jobs before it chips in, 

Whatever else can be said about this budget, which in my view is unlikely to kickstart the growth we need in the economy, it shows that Gordhan is not convinced Minister Zulu and her department has the wit, muscle of expertise to deliver large scale impact. 

The numbers speak for themselves. The Department accounts for around 0,1% of total government expenditure, but SMEs are expected to generate 90% of new jobs. Go figure.

What is far more significant are the new public procurement regulations announced in January which will direct 30% of government procurement contracts of over R30 million to black-owned or small businesses, where feasible (my emphasis). This implements what President Zuma announced in his 2015 SONA but is hedged with the phrase "where feasible" which is a get-out clause for government departments unable or unwilling to comply.

The danger with this directed procurement approach is that it puts up the cost of government services and can be manipulated towards to connected individuals or companies.

Another sign that the Treasury does not have much faith in the Department's capacity is found on page 19-20 of the speech, where he says the DTI will be leading an initiative "with other departments and agencies to make it easier to start a business, pay taxes, get credit, trade across borders, enforce contracts, and resolve insolvencies." Why have a Department of Small Business at all if it can't be tasked with this crucial aspect of improving conditions for business to trade, affecting small businesses the most?

There is no mention of the National Gazelles Programme which is supposed to be the Department's flagship programme for supporting high-growth firms. Is this because it does not have anything to show for it?

An unintended positive consequence of the increased tax rate of 45% on taxable incomes of R1,5 million, affecting around 110 000 people, is that they may be more incentivised to put some money into the Section 12J Venture Capital funds designed to direct angel investors into supporting fast growing businesses. 

An important but brief mention of the need to improve competitiveness and reduce concentration in the economy was not backed up with any policy prescriptions. It appears this will be left to the competition authorities to implement. 

Overall the budget was constrained by the very tight fiscal position the government finds itself it, which is entirely of its own making. When 60% of spending goes on government salaries (unproductive, many incompetent and corrupt) and 10% on servicing debt costs, we know the scales are tilted against growth.

For a view from our Finance Spokesman David Maynier on the first steps needed to reignite growth see here.