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Cape Town - When he makes his annual Budget speech today, Finance Minister Pravin Gordhan needs to take a tough stance on “frivolous” government spending.
Anything less, and South Africa could face a financial meltdown as mounting debt sinks the country into a crisis similar to that of Greece.
This warning has been sent by a top businessman and economist, who believes the country will be doomed if the minister does not tackle the long-running issue of bloated government salaries and gross misspending of state money.
“I give it three years,” said Iraj Abedian, the founder and chief executive of Pan-African Capital Holdings. “Three years until we need to implement stringent austerity measures.”
The well-known economist was addressing members of the Cape Town Press Club in Gardens yesterday.
He painted a bleak picture of the economy, from rising unemployment and increasing debt, to dwindling confidence from foreign investors.
While his outlook for the 2014 Budget speech is pessimistic at best – in an election year he expects there has been a lot of pressure on the minister to “blow hot air” – Abedian believes the minister can take many steps to avert a crisis three years down the line.
And this year is the time to start cracking down. Abedian says:
- Ministerial salaries need to be cut by 30 percent.
- All government departments must have their budgets reduced by 15 percent, with an opportunity to reverse the decrease if a department can prove it needs more funds.
- Flying business class, buying expensive cars and living in expensive hotels should be terminated.
“We are not a rich country, why should our ministers be driving around in BMWs?” he asked.
If Abedian’s recommendations sound familiar it is because they mirror comments made by Gordhan during last year’s Budget speech.
Last year, he said it was time to “cut waste and extravagance in government”. Expensive cars and official credit cards were among numerous luxury items that Gordhan wanted trimmed from state expenditure.
“But a year down the line these things are still happening,” Abedian said.
For the economist, a major part of the problem is that the finance minister seems to lack political backing.
He likened Gordhan to a director who makes big policy changes in his company, only to walk around the office and find everyone is doing something else.
“His heart is in the right place, and his head is definitely in the right place,” Abedian said. “But the problem seems to be that nobody is listening.”
He urged the minister to take a harder and more involved stance.
Abedian warned that South Africa was standing on the precipice of another credit rating downgrade – any slip-up over the next three years in its budget deficit targets would push the country over the edge.
This would have an adverse affect on an already stuttering economy by raising the cost of government debt and discouraging foreign investment.
The Treasury could not afford to increase its spending right now, said Abedian, noting that it would be interesting to see whether the minister would openly address this or toe the line because it was an election year.
But maybe the biggest challenge for Gordhan is that so much of the Budget is already set in stone. Abedian explained that 95 percent of the budget was already set aside for wages, social welfare and debt costs. Ultimately the minister has only 5 percent of the overall Budget to work with when it came to development.
“I expect (today) we will hear a lot of talk about this development and ambitious ideals, a lot of feeling and no substance.”
Sanlam investment economist Arthur Kamp agreed that the amount being spent on wages in the public sector was a major concern.
He said a wage agreement had managed to contain the wage bill in the past year, but the difficulty was keeping spending down in future.
“The question you are asking Pravin Gordhan is: can he do what former finance minister Trevor Manuel did in the 1990s?”
He said Manuel had managed to stabilise the debt ratio and bring it down, from 50 percent of gross domestic product to around 20 percent.
At that stage, tariff barriers were lowered, firms were becoming more competitive and there was lower inflation. Kamp said this had resulted in a “fantastic environment” for corporates and increased productivity. - Cape Argus