/ 28 October 2011

Cut consumption, state told

Cut Consumption

Finance Minister Pravin Gordhan made it clear in his medium-term budget policy statement this week that difficult decisions lay ahead for the state.

They included addressing rampant state wage bill increases and wasteful expenditure, and reprioritising projects in a bid to enable the government to gear spending towards investment instead of consumption. And although business has welcomed this shift, private-sector bodies warned that how the state implements the changes Gordhan proposed would be critical.

In these uncertain economic times and against the backdrop of the state’s imperative to create jobs, Gordhan’s department is tasked with finding the finances to fund a new R25-billion economic support package as well as money to pilot the national health insurance scheme. Plans to boost economic growth — yet ensure fiscal sustainability — include a wholesale shift in government spending from consumption-driven to investment expenditure. This is against the backdrop of a weaker global economy and disappointing tax revenues, Gordhan told journalists in Parliament on Tuesday.

According to the medium-term budget statement, gross tax ­revenue has been revised downwards by ­R13-billion to R728.6-billion, whereas economic growth has been revised downwards to 3.1%. The state nevertheless intends to increase government ­spending “moderately” in line with its ­countercyclical fiscal policy.

The state is expected to take expenditure to more than R1-trillion next year. This takes the budget ­deficit to 5.5% of gross domestic product in 2012-2013 and it is expected to decline by 3.3% in 2014-2015. The public-sector borrowing requirement is expected to reach ­R181-billion in 2012-2013 before dropping to R150.4-billion in 2014-2015. The cost of servicing the government’s debt, Gordhan said, was the fastest-growing item of government expenditure — rising to R115-billion in 2014-2015. But the widening deficit and the state’s rising debt levels will be coupled with investment in infrastructure investment and maintenance, which contributes to the underlying growth potential of the economy.

“The basic objective that we want government to begin to understand is that we don’t want government to borrow for government consumption or recurrent expenditure,” Gordhan said. “We want to borrow to invest in the economy. We want to borrow so that we increase the growth potential of the economy.” To achieve this, the state would want to shift the composition of government spending towards investment in infrastructure, which has lagged in recent years. The policy statement highlighted the underspending of capital budgets by municipalities and provinces.

Underspending by municipalities rose from 14% in 2008-2009 to 25% in 2010-2011, whereas provincial underspending rose from 8.3% to 16% in the same period. “There is a lot of hard talking to do in trying to achieve this objective of change in composition.”Equally, the question of the soaring state wage bill needed to be addressed, said Gordhan. “That is an area that we will have to engage with trade union partners and others and work out a ­credible way forward which allows us to achieve this objective of changing the composition so that we can invest in our economy,” Gordhan said.

Additional appropriations have been proposed for higher-than-planned wage bills amounting to R10.3-billion. The policy statement provided for a 5% wage increase, combined with a pay progression of 1.5%. It further recommended an improved balance between administration and service delivery staff and the number of “supernumerary” or redundant staff. This went hand in hand with eliminating waste and extravagance in the public sector.

Spending on non-priorities at municipal level in particular had to be addressed, including items such as unnecessary travel, luxury furnishings, excessive catering, unwarranted public relations spending and hiring of consultants for routine tasks. The R25-billion economic support package, to be administered by the department of trade and industry, is aimed at everything from ­assisting small businesses and supporting investment in network infrastructure to providing incentives for investment in economic ­development zones and improving regional integration.

Gordhan said the creation of a ­policy reserve was intended to assist in financing this package from the fiscus. This would improve cash management across government departments and state entities. Enterprises and public entities with cash and excess financial reserves or assets that could be more productively applied to fund public-policy priorities could return these to the fiscus, said the statement.

Gordan also singled out the re-prioritisation of projects to fund the policy reserve and introduced the idea of “haircuts” for departments. All departments falling within criteria yet to be determined would get an amount cut from their allocations, similar to that experienced in a 0.3% cut made in February.

Raymond Parsons, deputy chief executive of Business Unity South Africa, welcomed the change in spending composition. “If the government wants to improve efficiencies, curb wage increases and see better cash management in the public sector, this will call for new mind-sets and strong discipline.” The challenge is to develop a culture in the public sector that not only ensures “more will be achieved with less”, but also guarantees greater value for money in public services. The key to many of the good ­decisions in the mini budget will lie in effective implementation.

Cosatu decries’veiled attack’on public sector workers
Trade federation Cosatu’s response to the budget was lukewarm. In a statement it argued that there was a disconnect between policies such as the industrial policy action plan, the new growth path and the budget. Cosatu said although the path was mentioned, “no concrete measures are outlined to support its key jobs drivers, not least of which is manufacturing”. It was critical of the suggestion that rising public sector wages constrained the government in delivering services and infrastructure. It argued that the average inflation rate worked faced was 10%, whereas most wage settlements in the public sector were between 6% and 8%.

“The veiled attack on public sector workers is therefore unwarranted,” spokesperson Patrick Craven said in the statement. “Whatever workers have gained continues to be eroded by job losses that stem from constrained real-wage growth. We cannot call for reduction of inequality on the one hand and enforce a real wage freeze on the other hand.” While treasury was cautious of further extending government debt in light of the ongoing global turmoil, Cosatu said it wanted to see a more expansionary fiscal stance and greater intervention on the rand exchange rate.

But treasury’s director general, Lungisa Fuzile, maintained on Tuesday that there was little the state could do to intervene in currency markets, given the sheer scale of trades on the rand on a daily basis. Cosatu said it had hoped to see discussions on the introduction of a tax on luxury items and on the super-rich to expand tax collections to finance public infrastructure. It also proposed a tax on financial activities to redistribute resources towards industrial sectors.