#Budget2019: Businesses want to see a plausible plan of action
Budget / 20 February 2019, 12:15pm / Bonang Mohale
JOHANNESBURG – The tabling of the annual national budget speech by Finance Minister Tito Mboweni on February 20 is being rightly heralded by all stakeholders as a significant milestone in President Cyril Ramaphosa’s plans to get South Africa on a high growth path.
In many ways, however, the success of this year’s budget will be measured by its credibility in aligning with the State of the Nation Address (Sona) commitment, particularly financing the special unit with the office of NDPP, cutting back on wasteful expenditure, such as the public wage bill, eradicating theft of public resources, and reducing the money spent on servicing debt.
While economic growth this year is expected to be a bit firmer than last year, at 1.7 percent on latest World Bank estimates, it will hardly be enough to swell the tax base sufficiently to cope with the demands being placed on the fiscus.
In fact, in the absence of any provision for additional sources of revenue and/or reduction of government spending, the budget deficit could approach 5 percent of gross domestic product (GDP). This is evident in the well-known fact that government debt has increased by a factor of almost 5 since 2004, and the lesser known fact that household debt has increased almost fourfold over the same period.
One of the outcomes of this perennial over-spending is a woefully low level of domestic savings. This, in turn, restricts domestic investment expenditure to levels far below those required to produce and sustain meaningful economic growth.
The bottom line is there is simply no significant macroeconomic space to spend our way out of a growth-constrained environment. The question, therefore, is not whether tax rates should be raised, but rather how expenditure should be reprioritised towards growth enablers, such as energy supply, infrastructure and fixed investment, and by how much.
And this is where the real challenge lies: Will the Budget Speech focus our attention, and that of all the relevant decision and policy makers, on the fundamental issues that need to be addressed in order to place South Africa on a sustainable and inclusive economic growth trajectory of at least 5 percent?
Business, feeling the strain of subdued economic growth, will be looking at the contents of the Budget Speech for clear evidence of a plausible plan of action that will tangibly support the full range of commitments made by Ramaphosa in his State of the Nation address – a higher growth path, significant job creation, far less inequality, and the reliable delivery of affordable services.
In this regard, at least five issues come to mind.
First, at the core of South Africa’s weak growth and employment creation predicament lies a crisis of low levels of fixed investment, particularly in manufacturing and other increasing return sectors, due to limited competition and high barriers to entry, skills constraints, low levels of labour-intensive growth, and spatial fragmentation.
Addressing these structural faults through deep reforms will require concerted action across a range of different fronts. Reallocating tax incentives to raise fixed investment and black participation in increasing return activities that alleviate the balance of payments constraint through Ramaphosa’s “New Sectoral Deals” is urgent.
This should include a step increase in industrial financing, recognising prevailing fiscal constraints, including mobilising tax incentives and scaling up concessional flows via Development Finance Institutions like the Industrial Development Corporation (IDC) and Land Bank.
The second big issue involves the relative decline in institutional capacity and integrity over the past decade. Together, society’s legal and administrative institutions should form an “enabling environment” for the creation of wealth. This means that institutions are decisive in moulding the prosperity (or lack thereof) of a country. In the October 2018 MTBPS, Mboweni conceded "poor governance, reflected in inefficiency, corruption and financial mismanagement" reduced the impact of spending and increased pressure on the budget.
In response to the dire situation, Ramaphosa’s SONA speech committed to establish in the office of the NDPP an investigating directorate dealing with serious corruption and associated offences. To this end, the NDPP must be given prosecutorial capacity to conduct further investigations into evidence that has emerged from the Zondo Commission of Inquiry into State Capture, prosecute guilty parties and recover assets identified to be the proceeds of corruption.
The third issue relates broadly to the dire situation at our state-owned enterprises (SOEs) generally and Eskom in particular – where mismanagement and corruption has severely undermined their effectiveness, threatening to collapse our economy.
Ramaphosa’s prioritisation of a sustainable financial pathway for Eskom will depend (in the immediate term) on what government can do to support Eskom’s balance sheet, but this cannot be at the risk of burdening the fiscus with unmanageable debt.
A sustainable solution depends on what government can do to stimulate a better private sector response, and in this regard Mboweni must provide details of the revenue model that will underpin the process of establishing three separate entities – Generation, Transmission and Distribution – under Eskom Holdings.
Specific interventions should include inviting private sector participation where the government cannot afford to invest or where value for money can be demonstrated for a private sector risk premium.
It is therefore vital that the budget identifies action steps to immediately stabilise each entity’s finances and build institutional capacity to enable Eskom to raise funding for its various operations from the market and establish the basis for long-term sustainability.
The fourth urgent issue is that the economy’s growth and competitiveness depend on the productivity of its talent pool. However, productivity growth in South Africa is sluggish, to say the least, for reasons that are well-chronicled.
While improving access to tertiary education is a noteworthy goal, improving the effectiveness of existing spending on education should also be considered. Greater support to school education (teachers’ capacity and accountability) and post-school education and training poor students (through NSFAS) must be prioritised, but so too must the funding of deep educational reforms that focus on two years of compulsory early childhood development, early reading and foundational phase learning is critical for long-run growth.
The fifth big issue relates to the reconfiguration and rebuilding of the state. Besides the need for a more efficient, streamlined state, a reduction of the public sector wage bill must be accompanied by strident moves to professionalise the public service. Improving the delivery of public services will ultimately depend on strengthening the professional capacity of public servants to ensure that projects move faster on the ground.
In conclusion: The minister must, of necessity, present a budget that tends towards the fundamental building blocks of a sustainable growth path.
Bonang Mohale is the chief executive of Business Leadership South Africa. The views expressed here are his.