Six challenges for Minister Gordhan in his medium term budget policy statement
Tim Harris, Shadow Minister of Finance
23 October 2012
South Africa is in the eye of an economic storm. We have ended up here because the current national government, from the President down, has failed to speak with one voice on the economy and has been unable to steer us on a path of higher growth, despite our country’s abundant assets.
This week Finance Minister Pravin Gordhan has a chance to place a firm hand on the tiller and provide the leadership to cut through the mixed messages of the ANC government on the economy.
He needs to send a strong signal that debt will not be allowed to rise to unsustainable levels and that wasteful expenditure will be cut across government.
Most importantly, he must show investors that he is firmly in charge of economic policy, and that the government is able to implement a clear plan to ensure that South Africa is a place where they can do business.
Key indicators of our struggling economy include the following:
• A projected budget deficit of 5.2% for the 2012/13 financial year – the second highest budget deficit since 1994;
• Compensation for government employees is set to reach R379 billion or 35.5% of GDP;
• Government debt is approaching 40% of GDP – or 1.6 times government tax revenue;
• Since January 2011, there has been a net sell-off of R26 billion in South African equities by foreign investors;
• A massive increase in the trade deficit, from R8.7 billion in 2011, to R69.9 billion for this year;
• A current account deficit of R168.78 billion or 6.4% of GDP; and
• First round effects of the recent mining and transport strikes are estimated to have cost national revenue collectors in the region of R2.5 billion.
South Africa’s ballooning debt, coupled with policy uncertainty and the economic instability introduced by violent industrial strikes, has led to sovereign credit rating downgrades by two of the three major ratings agencies, Moody’s and Standard & Poor’s.
In this economic environment, government should display extra care in how it spends public funds.
The Annual Reports of national departments, however, show that government squandered R3.8 billion on irregular expenditure, R2.44 billion on unauthorised expenditure and R444 million on fruitless and wasteful expenditure during the 2011/12 financial year.
Collectively the annual reports show that national departments achieved only 52% of their targets.
To restore investor confidence in the South African economy and provide a foundation for job-creating growth, Finance Minister Pravin Gordhan must rein in wasteful and unproductive government expenditure and reassure investors that the government will not bow to populist pressure from its tripartite partners.
The DA believes that Minister Gordhan should address the following six themes in his medium term budget policy statement:
• Firmly dispel fears that government will bow to pressure from its tripartite partners to implement unsustainable, populist policy and commit to containing national debt to levels around 40% of GDP over the medium term.
• Announce a programme of wholesale policy reform and the implementation of the proposals contained in the National Development Plan starting with the departmental budgets announced in February 2013.
• Introduce steps to rein in irregular and wasteful government expenditure and improved accountability for the accounting officers in national government departments presiding over wasteful, irregular or unauthorised spending.
• Align public sector pay with productivity to incentivise efficiency in government spending.
• Implement policy steps to address the systematic drivers of strike action, which diminishes productivity and tax revenues and undermines political and economic stability.
• Recognise that current levels of state investment in social support programmes cannot be sustained unless we expand economic opportunities and empower South Africans through education to become productive participants in the economy.
The challenge facing Minister Gordhan is to reassure both local and foreign investors of South Africa’s political and economic stability.
He needs to do this whilst convincing credit agencies and economists alike of the soundness of his plans to consolidate the fiscus.
In essence, he must tighten the purse strings whilst persuading investors that investment in the South African economy still offers great and reliable returns with low levels of risk. Implementing the set of proposals listed here represents the best way of providing the economic leadership our country needs right now.