Patel's plan: A fatally flawed macroeconomic stance

When Minister Gordhan appeared before the Standing Committee on Finance after tabling the Medium Term Budget Policy Statement, he stated, in response to my question, that the key macroeconomic elements of the New Growth Path were already included in the fiscal framework. It is, therefore, not surprising that Minister Gordhan has not endorsed Minister Patel's plan: it is structurally flawed and cannot work.

A closer look at Minister Patel's plan reveals significant flaws in his approach to the macro-economy. At its core, the plan fails to address the fundamental distortions in our economy - which the minister conveniently chooses to ignore. Minister Patel clearly misses the point on employment creation in South Africa - tinkering with the interest rate and government spending plans could never reach his target of 5 million jobs in ten years.

Only by addressing key structural defects in the labour market can we ever hope to achieve such a boom in employment creation. Beyond that, the plan also calls for unprecedented macro and microeconomic interventions that will increase the cost of doing business in South Africa, drive investment from our shores and ultimately shrink our capacity to create jobs in a sustainable manner. Shrinking economic activity increases poverty - the opposite of what Minister Patel claims to be his objective.

The Democratic Alliance wishes to highlight the following key concerns regarding the plan:

Minister Patel's plan contains numerous proposals that have not been included in the current fiscal framework. This framework was approved by Parliament and will inform the budget to be announced in February. There is no room for Minister Patel's proposed expansionary expenditure.

The plan proposes a softer monetary policy approach in order to weaken the rand and help exporters become more competitive. This will not succeed. Lowering interest rates in an irresponsible manner will simply serve to increase inflation that will hurt our economy in the long run. A much better alternative plan in this regard would be to liberalise the exchange controls to allow the market to adjust for the overvalued rand.

The plan identifies government spending projects as the locus of job creation. This does not represent a sustainable job creation strategy as it relies on unsustainable government expenditure to create employment. Government should rather focus on reforming labour laws to make business easier and more efficient in South Africa. This will allow the private sector to employ more people. Other alternatives also include a wage subsidy that would assist the private sector in hiring more people.

The Minister's proposed caps on wages and prices are a reflection of his failure to grasp the realities of a modern economy, and cannot be implemented. Any such cap would simply drive business and investment away from our shores and will ultimately cost working class South Africans their jobs and drive more people into poverty. Government needs to be making enterprise and employment in South Africa easier, not more difficult as proposed by Minister Patel.

The proposal suggests measures to restrict the inflow of short-term capital. The Minister should rather focus on attracting long-term investment capital to the productive capacity of our economy. His proposals do the opposite.

The Minister's proposals also represent a clear threat to the independence of the Reserve Bank. Reserve Bank independence has become an internationally accepted aspect of modern macroeconomic policy-making and compromising this aspect of our policy makeup will have serious implications for the credibility of our policy-making. If we compromise Reserve Bank independence, we greatly increase South Africa's risk profile as a potential destination for foreign investment. In this way, the cost of business will also be increased by the Minister's proposals.

The general direction of Minister Patel's proposals represents a massive expansion for the role of the state in our economy and relies heavily on the state's ability to successfully implement these proposals. Government's weak track record on service delivery and implementation raises serious doubts as to whether the state would be able to implement these proposals.

In simple terms, Minister Patel's plan cannot work. It does not have buy-in from other ministries, contradicts the medium term budget policy statement and ignores those areas that should be in focus if we are to create the huge numbers of jobs that our economy desperately needs, so that we can break the back of the crippling poverty to which plans such as these condemn millions of our people.

Statement issued by Dion George, MP, Democratic Alliance Shadow Minister of Finance, November 25 2010

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