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South Africa – Finding Nene… the politics of troubled fiscal waters

Minister of Finance Nhlanhla Nene presented the Medium Term Budget Policy Statement (MTBPS) to Parliament on Wednesday, October 22. General consensus after the statement was that the successor to Trevor Manuel and Pravin Gordhan had been dealt a dismal hand, but played the cards the best he could. However, it could have been better. The politics of the MTBPS have yet to play out, but the portents are not good. There was still too much emphasis on State interventions to boost economic growth, job creation and electricity supply, and some other key issues continue to get more attention on pronouncement than they receive in terms of implementation. The only issue we can be 100% sure will translate into action come next February – with the presentation of the 2015/16 budget – is general direct tax increases and probably a few more of those sneaky indirect ones.

We have seen (over two decades) enough evaluations and assessments of State-Owned Enterprises (SOE) to make our heads spin, yet we now have to have another one to determine what we already know – that the vast majority of SOEs are inefficient, a waste of resources including money, and that dozens should be shut down or sold off to the private sector (in full or in part), and preferably yesterday. Eskom’s management is a short-sighted, incompetent mix-match of cadre deployment and poor planning, where overtly political considerations prevented any discussion (let alone action) on dismantling Eskom into smaller, more viable privatised or semi-privatised units or allowing private competition. There are few combinations on planet earth more terrifying than ‘Tina Joemat-Pettersson’ and ‘nuclear power’ in the same sentence, yet this is where we find ourselves after decades of infrastructure decay and ideological blinkers. Minister Nene’s plans and his optimism to resolve this critical issue appear based more on hope than expectation.

The politics of negotiating public sector wage increases has bedevilled this latest round of budget projections, and the idea that public sector wage increases will be kept around the planned 6.6% over the next few years is a pipe dream. Unions representing civil servants have opened their demands with a figure of 15%. But worse, the African National Congress (ANC) government has conspicuously failed to lead by example. Its excesses and arrogance are not going to sit well with public sector unions and, ultimately, with its ally in the Congress of South African Trade Unions (Cosatu). There are two nasty conclusions looming here. Firstly, the ANC does not have the political will to face down the public sector unions, and secondly, any increase above 6.6% (which the government will inevitably concede) has the potential to blow all the MTBPS projections out of the water. Asking unions for restraint in wage demands while hiking taxes and watching food inflation rise is a little naive.

Making matters significantly worse is that the public sector – and not private industry – is creating most of the paltry number of new jobs, which inflates the wage bill. Government announced in the MTBPS that it will spend R4.4trn over the next three years and that “moderating expenditure growth combined with tax measures to increase revenue will improve the fiscal position by R22bn in 2015/16 and R30bn in 2016/17.” In order to reach these targets, spending on non-essential goods and services will be frozen at current levels. This, Minister Nene stated, will “result in substantial savings over the next two years”. He pointed to savings of R555m across national departments resulting from cuts to expenditure on travel and subsistence. Advertising and communications budgets have been reduced by R240m and, regarding the issue of gravy train ’consultants’, lower spending on these advisers will generate savings of another R370m. Spending on venues and catering will be R150m lower. While there would obviously be other areas of savings that the minister did not list, those he did list come to a grand total of some R1.3bn – a little shy of the targeted R22bn revenue increase in the 2015/16 budget.

If the rest (or at the least the bulk of it) is to come from increased revenue then the tax future looks very dark indeed – more detail is expected in February 2015. This excludes the issue of the billions of rands needed by Eskom and the other SOEs (with fat budgets and thin delivery), and the selling off of a few state vehicles and some property is not going to cut it. The MTBPS plan requires a level of political will that the ANC government has yet to demonstrate given that any attempt to sell off even the smallest state asset will bring resistance, let alone the far bigger privatisations we desperately need. The prospect of the government holding firm on 6.6% wage increases for the public sector is somewhere between ‘zero’ and ‘no chance at all’. And where are the savings that Minister Nene’s predecessor promised (demanded) from the executive? There is far more government waste than the paltry few million the incumbent listed as savings, and we need to close those taps.

WHY DO WE CARE? In common with most government statements and policy objectives (there are exceptions, but these are few and too far between), the MTBPS cuts a far more dynamic and promising picture than its implementation is likely to deliver. The key issue that tends to be overlooked is the concept of political will. Standing firm on wage increases, delivering on budget savings, trimming executive excesses (such as Nkandla), and overriding ideological constraints on liberating State assets and policies constitute the political roadmap that the economy and markets will follow – for better or worse.

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