Cut wasteful expenditure, not the budget
21 October 2014
Note to editors: This statement was distributed to members of the media at a press briefing hosted by DA Shadow Minister of Finance, Dion George MP, and DA Parliamentary Leader, Mmusi Maimane MP, and DA Shadow Deputy Minister of Finance, David Ross MP, at Parliament this morning. The full document follows below.
The South African economy is stuck in first gear. Slow economic growth, high levels of unemployment and high inflation is likely to continue for some time.
South Africans face the most difficult economic conditions since 2009.
These tough economic conditions are highlighted by the following indicators:
35.6% of South Africans are unable to find work. The expanded unemployment rate reached 35.6% in the 2nd Quarter of 2014, increasing by 0.5 of a percentage point between the first and second quarter.
Our economy is no longer the most competitive economy in Africa.
Inflation is at 6.6%, which is above the Reserve Bank's 3% to 6% target range.
Government debt to GDP has increased from 27% in 2009 to 46% this year.
With South Africa facing such difficult economic circumstances, it is expected that in his Medium Term Budget Policy Statement on Wednesday, the Minister of Finance, Nhlanhla Nene, is going to face significantly reduced revenue in his budget. There is therefore every possibility of cuts to the budget, or a dramatically increased budget deficit.
No matter what selection of excuses the Minister chooses to use, be it the global economic climate at present, or be it the platinum strike and its impact on the economy, the reality remains, government is responsible for the mess we are currently experiencing. This is a type 1 case of self-inflicted pain.
We would never have been in our current fiscal situation if government was able to curb wasteful expenditure. The SIU estimates that we lose more than R30 billion per year to waste and corruption.
Therefore every cut Minister Nene makes tomorrow, whether it is to education, health, infrastructure or social development, must be viewed in light of ineffective financial management and corruption.
With the economy in shambles and government spending out of control, the DA calls on Minister Nene to show bold leadership and adopt steps which will address the current situation.
We believe this can be achieved by addressing the following three key issues:
Getting the deficit under control
Increasing economic growth
Cutting wasteful expenditure
Fiscal Deficit
South Africa's fiscal deficit currently stands at 4% of the Gross Domestic Product (GDP), making South Africa's current deficit R153 billion.
The DA suggests at least four areas in which government spending must be cut in order to reduce the deficit:
1. Wasteful expenditure. As alluded to above, wasteful expenditure is the biggest financial risk to South Africa at present and is exacerbated by the scourge of corruption in the public sector. Instead of cutting funding toward public services, government must ensure departments and their entities are held to meticulous account for their spending. We must stop the annual R30 billion loss in corruption and waste.
2. Stop bailing out unviable state owned enterprises like SAA. State owned public enterprises lie at the heart of the ANC's "developmental state" model, but the irony is that the majority of these enterprises are actually blocking South Africa's development. The Minister must cut financial bail outs to state owned enterprises, and encourage private capital funding of these enterprises.
3. Stop allowing the above-inflation pay hikes for public sector employees. The public sector wage bill is one of the government's biggest expenditure items. It currently amounts to R439 billion for the 2014-15 year. The DA expects Minister Nene to streamline certain parts of the public sector to rid it of deployed cadres, particularly in senior positions, who essentially do nothing but put a financial strain on the state.
4. Streamline the economics ministries to save costs and facilitate better policy coherence. South Africa has one of the largest cabinets in the world, with more cabinet ministers than the US, Germany and Japan, all of which have much bigger economies and broader tax bases. With 35 ministerial portfolios, the positive benefits of such a large cabinet are unclear. Some of these departments are superfluous and must be disbanded. Their powers and functions must be returned to the previously-mandated departments.
In addition, the DA would eliminate the large cost incurred by maintaining a ring of Deputy Ministers for all government departments, who require housing, staffing, travel, security, vehicles, offices, executive salaries, but have no clear mandate to deliver. With the country fast approaching an economic crisis, we must learn from developed nations that a bigger cabinet does nothing but cost government money. Cutting Deputy Ministers would free up multiple millions in annual funds which can be channelled into several front line service delivery departments.
Slow rate of Economic Growth
In his budget speech in February this year, former Finance Minister Pravin Gordhan predicted economic growth at 2.7% for 2014. This figure has recently been slashed to almost half of that, with revised predictions by the International Monetary Fund (IMF) and the Reserve Bank at 1.4% and 1.5% respectively. This is a matter of great concern, as without high growth, jobs are simply not created, and government revenue is lower than anticipated.
The DA believes that the following seven measures can help to kick start growth:
1. Regain confidence in mining and manufacturing sectors by reforming labour relations. The mining and manufacturing sectors are important players in our economy, as significant contributors to our tax base, and major job creators. However, recent labour unrest has led to a decline in investor confidence and uncertainty as to future investment. It is estimated that approximately R5 billion in corporate tax mining revenue is set to be lost this fiscal year, due largely to the 5 month long platinum strike earlier this year. Reform measures to labour relations must be announced, which will regain confidence in these sectors, and save jobs.
2. Increase spending on infrastructure and transport. One of the most frequently expressed concerns relating to South Africa's growth is inadequate infrastructure. This directly affects the high cost of doing business in South Africa, as foreign investors look to other developing economies where costs are significantly lower. Minister Nene must commit to not wavering on the spending on infrastructure set out in the NDP, and ensure that there are no cuts to infrastructure spending.
3. Abolish exchange control to encourage foreign investment. The archaic, out of date foreign exchange control regime leads to the decline of investment in our economy, which severely hampers growth and job creation. These exchange controls act as a tangible vote of no confidence in the government, by the government. The Minister must therefore announce a plan to abolish exchange controls once and for all, so that local and foreign investment in our economy is stimulated.
4. Promote, support and encourage entrepreneurship with new incentives. Entrepreneurs and small businesses are at the very core of job creation. An increase in SMME's spurs competition, promotes innovations, and ultimately creates new jobs for the 35% of South Africans who find themselves without work. The Minister must commit to increasing budgets to competition authorities, incentivizing small business development by investing in support programmes for SMME's , and cutting red tape to assist and simplify the entry of new players in the economy.
5. End policy gridlock by shelving the New Growth Path, disbanding the economic development department and focusing solely on the NDP. It is time for government to finally and unequivocally speak with one voice on the country's economic policy and its implementation, as uncertainty inevitably hinders both growth and job creation. For the economy to grow, we must attract foreign spending in our economy. However, investor confidence, both from within our borders and abroad, is seriously impeded by the uncertainty relating to government's economic policies.
6. Promote and simplify trade across boarders by spending more on export promotion. South Africa is falling behind in terms of modern day international trade. According the World Bank, South Africa is ranked 106 out of the 188 countries for "trading across borders". Moreover, only 1.48% of the Department of Trade and Industry's budget is spent on trade promotion. This is concerning, as trade is one of the primary methods in promoting economic growth. The story is simple: Our exports are decreasing while our imports are increasing. This needs serious attention.
7. Improving local government efficiencies to improve service delivery and spur growth at local level. By opening up all local tender processes, local governments can save money, deliver more and grow the economy from local level.
Full text of the DA's position paper:
Budgeting for Growth and Jobs: DA Position Paper on 2014 Medium-Term Budget Policy Statement
22 October 2014
Introduction
The South African economy is stuck in first gear.
Slow growth, high levels of unemployment and ever-increasing inflation has become the economic reality in South Africa.
Low growth and high inflation persists, as we face a serious stagflation problem. South Africans face the most difficult economic conditions since 2009.
These tough economic conditions are highlighted by the following indicators:
35.6% of South Africans are unable to find work. The expanded unemployment rate reached 35.6% in the 2nd Quarter of 2014, increasing by 0.5 of a percentage point between the first and second quarter.[1]
Our economy is no longer the most competitive economy in Africa.[2]
Inflation is at 6.6%, which is above the Reserve Bank's 3% to 6% target range.
Government debt to GDP ratio has increased from 27% in 2009 to 46% this year.
Finance Minister Nene faces a difficult challenge to help kick start the economy in these conditions, given the increasingly difficult fiscal position government finds itself in.
We believe that the state of government finances can be summed up by two key issues:
Ever increasing Fiscal Deficit - The deficit currently stands at 4% of the Gross Domestic Product (GDP), which is roughly R153 billion. Additional borrowing is therefore necessary to cover expenses; further increasing the debt servicing costs. This is caused by slow economic growth and the inability to contain government spending. Serious intervention is required to address this issue.
Slow rate of economic growth - The February budget predicted economic growth at a rate of 2.7% for 2014, however revised predictions by the International Monetary Fund (IMF) and the Reserve Bank are 1.4% and 1.5% respectively. This means that state revenue collection will be lower than anticipated, which will place additional pressure on the state's finances.
The South African government will therefore very likely face a larger-than-anticipated deficit.
Given the deterioration in economic growth prospects, now half of the projected growth in February, significant intervention is required to ensure that our public finances remain viable.
In the Medium Term Budget Policy Statement this Wednesday the Minister has an opportunity to make significant amendments to the budget tabled in February this year. It will be crucially important that he reassures markets of his commitment to fiscal discipline, particularly relating to wasteful expenditure and corruption.
We need to see urgent action by the Minister to cut wasteful expenditure and to tighten government's belt to control the deficit. It is a sad reality that this potentially-difficult belt-tightening process would never have been necessary if government was simply able to reign in waste and corruption from the get-go.
Fiscal Deficit
South Africa's fiscal deficit currently stands at 4% of the Gross Domestic Product (GDP). The GDP is roughly R3.8 trillion, making South Africa's current deficit R153 billion for this financial year.
The graph below indicates the steady increase in our debt as a percentage of our GDP over the last 5 years:
Fiscal deficits are intrinsically linked to economic growth. If the economy is growing faster, more revenue is collected and debt shrinks relative to GDP.
But the opposite is true too: due to the dismally low state of economic growth at present, revenue will be lower than anticipated and the stock of debt will grow relative to GDP.
The two main factors that contribute to our large fiscal deficit are the decrease in tax revenue received by government, and the inability to limit spending by government.
In relation to the decrease in tax revenue, only sufficiently high economic growth can act as a remedy to this shortfall. Currently, weak domestic demand and the platinum strike are expected to see revenue fall short of Treasury's projections, with weak consumer demand curbing value-added tax collections, which accounts for more than a quarter of tax revenue. A weak economy and strike-related declines in mining and manufacturing could also reduce inflows from corporate tax, which accounted for about one-fifth of tax revenue last year.[3]
In relation to the second factor, the DA expects the Minister to cut government spending in his MTBPS. This is required to adequately manage the deficit and to ensure South Africa does not regress further. There should be particular focus on cutting wasteful expenditure.
Indeed, we would never have been in this position if government was able to stop waste and corruption earlier. The SIU estimates that we lose more than R30 billion a year to waste, corruption and fraud. This contributes significantly to the fiscal pressure we are under now.
In order to alleviate pressure, the DA suggests at least four areas in which government spending must be cut in order to reduce the deficit:
Wasteful expenditure
Wasteful expenditure is the biggest financial risk to South Africa at present. This is exacerbated by the scourge of corruption in the public sector. It is without question that with a predicted economic growth rate of below 1.5%, the existing fiscal deficit will continue to grow unless corruption and wasteful expenditure are dealt with in a firm and uncompromising manner. Instead of cutting funding toward public services, government must ensure departments and their entities are held to meticulous account for their spending.
The Special Investigating Unit (SIU) estimates a staggering R30 billion is lost to waste and corruption every year.
With every budgetary cut Minister Nene makes, the question to be asked is - was it avoidable if we didn't waste so much?
The DA expects the Minister to hold to account departments in which wasteful expenditure occurred, so that optimal financial performance prevails, and the deficit does not increase.
End hand outs to state owned enterprises
State owned public enterprises lie at the heart of the ANC's "developmental state" model, but the irony is that the majority of these enterprises are actually blocking South Africa's development. These enterprises are increasingly becoming a burden on the state and the public purse.
The following recent events illustrate this:
South African Airways (SAA) is currently seeking financial support from government, a mere two years after it was granted R5 billion in loan guarantees.[4]
Recent reports suggest the government is to sell its 13.9% stake in Vodacom, worth R25.7-billion, so it can use the cash to give financial assistance to state-owned companies, including Eskom and South African Airways.[5]
Last month, Cabinet announced that it had approved a funding package to help Eskom with its R225 billion shortfall.[6]
A critical ideological shift is required, which sees private capital injected through the privatisation of these enterprises, whether in part or in full. This will bring with it top-level private sector management skills, one area where South Africa has world class talent.
This will help to significantly improve the management of these institutions, and will ensure better service delivery for all South Africans. It will also curtail the generous flow of cash from the Treasury to mend the consequences of financial mismanagement.
The Minister must therefore cut financial bail outs to state owned enterprises, and encourage private capital funding of these enterprises, which will have a multitude of benefits.
Cutting the public sector wage bill
The public sector wage bill is one of the government's biggest expenditure items. It currently amounts to R439 billion for the 2014-15 year. There are approximately 1.3 million people employed by the national and provincial governments.[7]
This already inflated amount looks set to increase further as government officials are currently demanding a 15% wage increase.[8] If government agrees to a 15% wage increase, the public debt to GDP ratio would soar even further.
The DA expects Minister Nene to streamline certain parts of the public sector to rid it of deployed cadres, particularly in senior positions, who essentially do nothing but put a financial strain on the state.
Minister Nene must also expressly reject the 15% demand by the public sector tomorrow, as it is simply not affordable. Such an increase would bankrupt the government.
Cutting unnecessary Ministries
South Africa has one of the largest cabinets in the world, with more cabinet ministers than the US, Germany and Japan, all of which have much bigger economies and broader tax bases. With 35 ministerial portfolios, the positive benefits of such a large cabinet are unclear.
Some of these departments are superfluous and must be disbanded. Their powers and functions must be returned to the previously-mandated departments.
In particular the Department of Economic Development and the Department of Women, Children and People with Disabilities must be dissolved.
The department of Women, Children and People with Disabilities is not a delivery orientated department, but has a mandate to support the activities of other departments through coordination, research, and creating awareness of the issues affecting vulnerable groups. This department has been a failure and has consistently overspent on its own administration and staff cost, whilst under-spending on what should be its core programmes. The disbanding of this department would save at least R200 million a year.
The Department of Economic Development on the other hand is another example of unnecessary bloating of the cabinet, as its functions were adequately performed by the Department of Trade and Industry prior to its inception. Disbanding it would free up almost R170 million.
In addition, the DA would eliminate the large cost incurred by maintaining a ring of Deputy Ministers for all government departments, who require housing, staffing, travel, security, vehicles, offices, executive salaries, but have no clear mandate to deliver. With the country fast approaching an economic crisis, we must learn from developed nations that a bigger cabinet does nothing but cost government money. Cutting Deputy Ministers would free up multiple millions in annual funds which can be channelled into several front line service delivery departments.
Slow rate of Economic Growth
In his budget speech in February this year, former Finance Minister Pravin Gordhan predicted economic growth at 2.7% for 2014.
This figure has recently been slashed to almost half of that, with revised predictions by the International Monetary Fund (IMF) and the Reserve Bank at 1.4% and 1.5% respectively.
This is a matter of great concern, as without high growth, jobs are simply not created.
As much as government believes so, the truth is that jobs are not created by government itself. Rather, government's role is to create an economic environment in which jobs are created. The only way to create new, real, and sustainable jobs is to have a healthy, thriving economy. Sadly, at a predicted growth rate of 1.5%, our economy is anything but healthy and thriving.
The DA believes that the following six measures, will lead to higher economic growth, which results in the creation of jobs and the reduction of poverty.
Regain confidence in mining and manufacturing sectors
The mining and manufacturing sectors are important players in our economy, as significant contributors to our tax base, and major job creators. However, recent labour unrest has led to a decline in investor confidence and uncertainty as to future investment. It is estimated that approximately R5 billion in corporate tax mining revenue is set to be lost this fiscal year, due largely to the 5 month long platinum strike early this year.
Minister Nene must therefore urgently announce the following reform measures to labour relations in our country, which will regain confidence in these sectors, and save jobs:
Call for a review of our labour laws to discourage closed-shop agreements;
Move towards a more decentralised model for collective bargaining arrangements;
Remove the extension of centrally bargained agreements to non-parties; and
Call for the introduction of pre-strike balloting.
These proposals are precisely what the DA has been calling for, and on Wednesday Minister Nene must call for such reforms.
Increase spending on infrastructure and transport
One of the most frequently expressed concerns relating to South Africa's growth is inadequate infrastructure. This directly affects the high cost of doing business in South Africa, as foreign investors look to other developing economies where costs are significantly lower.
The WEF's Global Competitiveness Index ranks South Africa 66th out of 148 countries in terms of infrastructure, below countries such as Mexico (64th), Puerto Rico (63rd), and Chile (46th).
Infrastructure bottlenecks are not just a medium term worry, but have been flagged as a constraint on near term growth.[9] The cost and reliability of road and rail transport continue to inhibit access to markets and ports and constrain investment and growth. Moreover, poor information and communication technology infrastructure further impedes economic growth and local production.
The National Development Plan correctly targets spending on infrastructure at 10% of the GDP.
On Wednesday, Minister Nene must commit to not wavering on the spending on infrastructure set out in the NDP, and ensure that there are no cuts to infrastructure spending.
Abolish exchange control
The archaic, out of date foreign exchange control regime leads to the decline of investment in our economy, which severely hampers growth and job creation.
Foreign exchange controls do not fill local or foreign investors with confidence. Investors are highly sceptical of the motivations behind such controls, which in turn discourages even our own local investors from keeping their money in South Africa, resulting in local capital being invested in foreign economies.
These exchange controls act as a tangible vote of no confidence in the government, by the government.
The Minister must therefore announce a plan to abolish exchange controls once and for all, so that local and foreign investment in our economy is stimulated.
Promote, support and encourage entrepreneurship
As much as government would like to believe otherwise, jobs are not created by government itself. Rather, jobs are created by the private sector, predominately through small and medium sized businesses (SMME's). Therefore it is government's role to create and foster an economic environment which is conducive to business activity and job creation.
Therefore, entrepreneurs and small businesses are at the very core of job creation.
The DA calls on government to commit to creating 1 million new entrepreneurs by 2020.
This will be done by increasing budgets to competition authorities, incentivizing small business development by investing in support programmes for SMME's , and cutting red tape to assist and simplify the entry of new players in the economy. The growth and success of these businesses holds the key to creating jobs and decreasing unemployment in South Africa.
An increase in SMME's spurs competition, promotes innovations, and ultimately creates new jobs for the 35% of South Africans who find themselves without work.
Furthermore, the DA calls for a separate, independent budget for the Department of Small Business Development, whose budget currently falls under the Department of Trade and Industry (Dti). This crucial job creating department cannot have its financial livelihood controlled by the DTI, and must receive an independent budget in order to carry out its mandate.
If the government is serious about addressing unemployment, Minister Nene's MTBPS should give substantial focus to the promotion and financial support of entrepreneurs and small businesses.
Eradicate policy inconsistency
It is time for government to finally and unequivocally speak with one voice on the country's economic policy and its implementation. Uncertainty inevitably hinders both growth and job creation.
For the economy to grow, we must attract foreign spending in our economy, in the form of tourism and entrepreneurial innovation. However, investor confidence, both from within our borders and abroad, is seriously impeded by the uncertainty relating to government's economic policies. While the NDP envisages the private sector at the centre of the economy, both the IPAP and NGP place the State at the centre of directing economic activity. Against this backdrop of policy inconsistency, the government must show bold leadership as to what its economic policies are, and by doing so allowing foreign investors to regain confidence in the economy. Ideological battles within the tripartite alliance must be abandoned, and the NDP must be implemented in its entirety.
Minister Nene is required to adhere to the NDP, which will create a sustainable economic environment that encourages business to invest capital and the economy to be stimulated.
Promote and simplify trade across boarders
South Africa is falling behind in terms of modern day international trade. This is for two reasons.
Firstly, restrictive regulations severely prohibit the expansion of trade with foreign economies. According the World Bank,[10] South Africa is ranked 106 out of the 188 countries for "trading across borders". This is concerning, as trade is one of the primary methods in promoting economic growth. The restrictive regulation of trade must be simplified to boost South Africa's trade, not just with our neighbours, but across the world.
Secondly, there is a severe shortage in the amount of investment in trade promotion by the government. South Africa spends a mere R140 million per year on trade promotion, which amounts to just 1.48% of the Department of Trade and Industry's total budget.
Comparable developing economies spend much more than this. An example of this is the Brazilian government who spend hundreds of millions of dollars a year on the promotion of Brazilian exports.
Promoting exports is a good use of money because:
- Exports secure SA's supply of foreign exchange;
- It allows local businesses to keep growing even if there is a domestic recession;
- 99.2% of the world's consumers live outside South Africa.
Moreover, it will go far in addressing the current trade deficit. South Africa's trade deficit more than doubled to R16.3 billion in August from a revised R6.82 billion shortfall in July. Exports in August fell 9.6% to R77.24 billion while imports were up 1.4% at R93.53 billion. The August data brings the cumulative deficit for the year to R70.74 billion, compared with a R51.88 billion gap over the same period in 2013.[11]
The story is simple: Our exports are decreasing while our imports are increasing. This needs serious attention.
On Wednesday, the Minister of Finance should announce a set of reforms to boost trading across borders, and simplify import and export procedures, in order to address the trade deficit.
Conclusion
Our economic stability is at stake this Wednesday when the Minister makes his Medium Term Budget Policy Statement.
Due to no fault but its own, the government is in a tight space fiscally, and extremely tough decisions are to be taken.
Bold and uncompromising leadership is required to steer our economy in the right direction.
The DA strongly urges Minister Nene not to let this opportunity pass by, as it may very well be a defining moment in our economic future.
Footnote:
[1] StatsSA's latest Quarterly Labour Force Survey (2014 Q2)
[2] The World Economic Forum's Global Competitiveness Index, 2013
[9] International Monetary Fund, World Economic Outlook - Legacies, Clouds, Uncertainties (October 2014).
[10] World Bank's Doing Business Report, 2014.
Statement issued by Dion George MP, DA Shadow Minister of Finance, October 21 2014
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