Speech by Tim Harris MP, DA Shadow Minister of Finance, on the consideration of the fiscal framework and revenue proposals, National Assembly, March 12 2013

Gordhan must stand up to Cosatu and implement his budget

South Africa is in a fiscal corner. We are growing at only 2,7%, less than half the rate of our neighbours on the African continent and we face a R16 billion shortfall in tax revenue in this budget. This means we have had to increase borrowing to pay our bills. This year we will budget deficit in excess of 5% of GDP for the first time since 2009, when we had to table a short term response to the global financial crisis.

The effect of our larger deficit will be to drive government debt higher over the medium term. Net government debt will top 44% of GDP in 2016. This will not mitigate the ratings agencies' concerns about a lack of fiscal space.

We have been in a situation like this before. In the late 90s, debt reached 45% of GDP for several years. What did we do then? The solution was the partial implementation of the Growth, Employment and Redistribution plan (GEAR) which saw then-Finance Minister Trevor Manuel take advantage of benign global economic conditions to draw down debt levels, reform the budget process and implement consistent monetary policy. Crucially, Minister Manuel had the full backing of then-President Mbeki to implement these reforms in the face of opposition from Cosatu.

Today, with debt levels approaching similar levels, Minister Gordhan needs to do something drastic to get us out of this fiscal corner.

But he faces three additional challenges that his predecessor didn't.

Firstly, he has the fall-out from the global financial crisis to deal with, including the sobering fact that South Africa is recovering far slower than most emerging markets. They say when the tide goes out you can see who's been swimming with no pants. It is clear that because we did not tackle reforms to our economy or spend enough on infrastructure when times were good, the global economic slowdown has revealed deep structural problems in our economy.

Secondly, he faces a recent history of ANC mismanagement of key elements of the economy. Infrastructure spending from 1996-2006 was half of what it should have been. Reforms to collective bargaining have been blocked. The restructuring of state assets has been off the table for a decade and exchange controls remain a huge disincentive to investment.

Thirdly, while he has the National Development Plan (NDP) on the table as a potential reform agenda to drive economic growth and help him draw down debt, it is not clear that he has the support of President Zuma in getting it implemented. 

In recent budgets, when the Finance Minister has tried to spend less on public sector wages for example, his decision has been effectively over-ruled by Cosatu and the former Publice Service Minister. When he tries to spend more, say R5 billion on the Youth Wage Subsidy, he is effectively blocked by Cosatu.

The only way through this problem is for the President to back his Finance Minister fully, but this president seems to spend his time placating the ANC's allies, not taking the tough decisions leadership requires.

Mr Speaker, implementing the NDP is the best way out of this fiscal corner. Let me tell you why.

The Minister has three options.

First, he can cut spending. Reducing funds for bloated ministries and extravagant ministerial perks, clawing back some of the R30 billion lost to corruption, cutting unnecessary spending on consultants, and freezing spending on the President's home at Nkandla, will all help, but we accept that broader austerity would hurt growth.

Second, he can raise taxes, but South Africans are already overtaxed and don't see value from the taxes they pay. Increases would also hurt growth. 

This leaves him with the third option: driving growth.

Thankfully, the National Development Plan, if it is implemented, would drive growth higher, raising more revenue for the state. GEAR helped us draw down debt in the mid-90s. Now the NDP can be our GEAR and get us out of this fiscal corner.

So we welcome the fact that this budget is broadly aligned with the plan, but it lacks detail on key reforms in the Plan that would scrap cadre deployment or hold public servants or teachers to account.

If you are looking for reasons why these are left out you only have to look at what Cosatu had to say about the NDP 

"We remain extremely concerned that the conservative and pro-capital National Development Plan continues to receive ringing endorsement from the government. We dispute the assertion of the speech that there is a broad endorsement of the NDP. The only other formations to have welcomed this have been pro-business opposition parties and big business. Labour and many other progressives in the country have long realised that this plan is the reinforcement of the status quo in economic terms."

Mr Speaker, this government loves to speak as if the National Development Plan is broadly accepted by everyone in South Africa. The truth is that it is accepted by everyone in this house except, presumably, the 35 ANC members who are members of Cosatu.

What is alarming about this is that Cosatu has a history of blocking policy that would help tackle our greatest challenges. They have successfully blocked the Youth Wage Subsidy for the past three years, so while we are pleased that the Finance Minister has included it in this Budget as the Youth Employment Tax Incentive, or YETI, we hope that he has the political capital to implement it this time.

This incarnation of the Youth Wage Subsidy seems almost identical to the version detailed in the Treasury's document released in February 2011. It will also share the costs of employment through a PAYE tax break for employers. The only apparent difference is that it will apply to new workers only, and it will be funded with R4 billion, instead of R5 billion, over three years.

Given that 70% of unemployed South Africans are between the age of 15 and 34 it is distressing to hear how Cosatu responded to this proposal. They said:

"We reiterate our rejection of the Youth Wage Subsidy as an incentive for employers to hire young people. This is not a solution to the unemployment crisis facing young people."

Numsa went further saying:

"We are stunned by government's attempt to reinstate the youth wage subsidy under the guise of a youth employment incentive. This is unacceptable. We remain opposed to a youth wage subsidy or any other iteration of a youth wage subsidy."

A national Youth Wage Subsidy would break the cycle of unemployment for young South Africans. It is time for spurious opposition from the ANC's alliance partners to end.

The reappearance of the Youth Wage Subsidy was a highlight for us but there were other key DA policies in the budget:

·         A R2,9 billion tax incentive package for Special Economic Zones, including a generalised wage subsidy and cut in income tax from 28% to 15%;

·         minor reforms of small business taxation totaling a modest R360 million; and

·         increased tax deductibility of charitable donations.

But while there were some highlights, there were also lowlights.

In particular, the Minister has failed to table solutions to deal with the state's incapacity to spend on infrastructure, which has led to infrastructure budgets remaining underspent by an average of 22% over the past three years. To exacerbate these shortfalls, spending on infrastructure as a percentage of GDP in the budget is projected to fall to 7% over the medium term; well below the 10% targeted by the NDP.

We are also concerned that the cut in the contingency reserve may be over ambitious and leave us exposed.

In addition, failure to scrap the final remaining exchange controls will mean that the proposals aimed at integrating our economy with the rest of the continent amount to tinkering round the margins.

Honourable Speaker, we support this budget because the Minister has set out to align the budget with the NDP, doubled down on the Youth Wage Subsidy, and tabled key DA policies. 

But, I must warn the House, if Minister Gordhan continues to have his policy implementation blocked by Cosatu, our support will end.

Issued by the DA, March 12 2013

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