Nene’s hospital pass

Valiant effort to sell a credible plan falls a little short.

New Finance Minister Nhlanhla Nene’s presentation of the Medium Term Budget Policy Review (MTBPS) did not fill me with a lot of confidence. His assessment that the South African economy is at a turning point is correct, but he did not offer many concrete solutions that will ensure a swift turnaround.

It was Nene’s first major public appearance since his appointment and a lot has changed since Pravin Gordhan presented the national budget in February this year.  In February, Gordhan aired growth expectations at a relatively good 2.7% for 2014, but less than eight months later these expectations have dwindled to 1.4%. Some economists even believe this expectation is optimistic. So Nene did get a bit of a hospital pass.

Despite this, Nene valiantly tried to sell a credible plan and belief that the National Treasury is in control and that he knows what needs to be done to ensure continued fiscal prudence. Unfortunately, this is where the politician in him took centre stage.

Nene correctly emphasised that state revenue is under pressure and that concerted efforts will be undertaken to increase revenue. He also emphasised that government spending must be reigned in.

Let start with government revenue.  Prior to Nene’s address many commentators said it was inevitable that South Africans would see increased taxes to compensate for reduced tax revenue. Nene alluded to increased taxes, but that details will only be forthcoming when he steps up to the plate in February next year.

South African taxpayers are already heavily taxed and any notion that taxpayers will have to fork out more come February, will be met with much resistance. There is a perception that government is wasting money and that corruption is out of control ­– from local government right to the top.

Any rise in taxes will just fuel this already untenable situation.

Superficial belt tightening

Nene tried to show that government would also come to the party and tighten its belt. Unfortunately, his proposals are cosmetic and completely insignificant. His proposed savings of R1.3 billion over two years is meaningless. Surely government can do more than limit the amount of food at meetings, cut the use of consultants and reduce advertising?

This R1.3 billion represent savings of around R650 million a year, a fraction of government’s total expense budget of R1.25 trillion. At best it will make a rounding difference. It is an insult to taxpayers. Surely there is much more room for savings.

An efficient anti-corruption campaign could potentially yield a lot more. This would however require a political will, which is yet to be demonstrated. 

Public wage hike

What was very interesting was Nene’s resolute message that government cannot afford any above-inflation wage hikes in the public sector. But I am not too optimistic that this will happen, as government is in many ways being held hostage by trade unions. Cosatu will surely scoff at this noble “6%-is-max” notion, as double-digit increases have become the norm.

Nene’s warning that any above inflation wage hikes must be accompanied by productivity increases is also ironic.  This is exactly the same argument put forward by the private sector during all wage negotiations. It was also a hot potato during the recent protracted strike in the mining industry and I cannot recall that government championed this message during the negotiation process.

It is indeed brave war talk, but I doubt whether this attitude would survive the current public wage negation process. 

Hopefully it will lead to (some) greater understanding within government circles that above inflation wages hikes have serious repercussions within the private sector.

It is the economy, stupid

The only sustainable remedy to government fiscal challenges, as Nene so eloquently described it, is to accelerate economic growth. South Africa needs growth of at least 5% and it is virtually inconceivable that we will see this rate within the next five years.

Nene partly attributed the downward revision of the growth forecast to 1.4% to the weaker global environment all around the world. He also cites obstacles in South Africa such as energy constraints, labour market disruptions, skills shortages, administrative shortcomings and difficulties in industrial transformation.

It was a short MTBPS speech – maybe the shortest in recent history – but there must be more public reflection of what needs to be done to accelerate economic growth. It is not only the best way for government to increase revenue, but will also address many social problems government wants to tackle through social policies.

We need policies that make it attractive for international and local companies to invest in South Africa, and probably more importantly, confidence that these policies will not change unexpectedly. Current labour legislation is aimed at protecting jobs, but in reality it is destroying jobs.

The most notable message of the MTBPS is that government is starting to appreciate that privatization, or greater private sector participation, may be a solution to Eskom’s power woes. We do not need secret deals with the Soviet Union or another Madupi or Kusile. Hopefully this approach can be extended to other state owned companies such as the SAA and Transnet.

I wish Nene all the luck in the world for the preparation of the 2015 budget. It will probably be the most difficult one since 1994.

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