Treasury gets tough on the public sector wage bill
On 25 October 2011 finance minister Pravin Gordhan delivered the nation’s 2011 Medium Term Budget Policy Statement (MTBPS). We’d like to spend a few minutes looking at highlights from the minister’s presentation as well as picking up on aspects relevant to the financial services industry. (If you’d like more detail you can access the entire speech at http://www.treasury.gov.za/).
Gordhan started his presentation by reminding the nation of the cloudy global economic outlook. “We present this policy statement at a time when our own economy is recovering, but there are still winds of uncertainty in places that seem far away, which can rapidly affect us, for better or worse,” he said. He warned that the crisis of leadership currently reflected in the Euro-zone and in Europe was having a damaging effect on the global economy including our own. But his overarching message was that South Africa’s economic transformation hinges on “an extraordinary national effort from all role-players, committed not just to identifying the barriers to progress, not just to proposing solutions, but also to working together, over the long haul.”
A tricky balancing act
As minister of finance one of Gordhan’s biggest challenges is how to balance dwindling tax revenues with growing expenses. Government has to spend in order to create jobs, maintain the value of the social wage and finance ongoing economic transformation. Prudent financial management requires that these objectives be tackled in a sustainable manner. And National Treasury cannot be faulted for its efforts in this regard.
The state finances have come under pressure of late as revenues crimp due to slower than expected economic growth. This year (20011/12) will see a slight dip in tax revenue collection – to around R729 billion – which is R13 billion below the February budget estimate. Even so, government will spend more than R1 trillion as it pursues its various social and infrastructure commitments. The result is that the country’s deficit will increase to 5.5% of GDP this year. Gordhan says the deficit will decline to 5.2% next year and to 3.3% by 2014/15.
We’ve complained on numerous occasions about the drag a bloated public sector places on the economy. That’s why we welcome one of the recurring themes in the latest MTBPS – that of spending taxpayers money in a more sensible fashion. “We must see a moderation in the growth of the wage bill and spending on goods and services over the MTEF period ahead,” said Gordhan. He was particularly unimpressed with the spike in the public service wage bill, which has increased from 35% to nearly 40% of non-interest expenditure over just three years. You may recall a similar gripe in the National Budget presentation earlier this year. “The proposed framework for the 2012 Budget provides for more moderate cost-of-living adjustments for public sector employees than in recent years, to be implemented with effect from April each year,” he said.
A shake up in the financial sector
The global financial crisis has forced a rethink on fiscal and monetary policy. Our main defence against future financial system collapse will be to move to a ‘Twin Peaks’ model of banking system regulation, which separates the task into prudential oversight (under the SA Reserve Bank) and market conduct and consumer issues (under the Financial Services Board). The minister reports that National Treasury together with the South African Reserve Bank has already embarked on financial regulation reform initiatives as set out in the paper A Safer Financial System to Serve South Africa Better, published in February this year.
One of the most significant announcements in the 2011 MTBPS was the decision to reclassify all inward listed shares on the JSE as domestic assets, which will in turn be included in the respective indices. Chris Gilmour, an investment analyst at Absa Asset Managers believes this is great news. It will result in companies such as British American Tobacco finally taking their rightful place in the FTSE / JSE Top 40 index, for example.
Another welcome announcement is that “steps will be taken to simplify procedures and reduce the cost of cross-border money remittances, particularly to neighbouring countries and the rest of Africa.” This will go a long way to promoting trade and economic freedom in the region. Overall our banks and financial markets are in robust condition. Gordhan explains: “Whilst some banks in advanced economies now appear to be undercapitalised, our own banks and financial markets are in robust condition. Our regulatory and oversight systems have stood the test of time, ensuring that our financial sector has remained steady in these troubled times.”
The seven percent pipe dream
The Holy Grail for South African economic development would be to achieve sustained economic growth (GDP) of 7% per annum. At this rate the economy would double in size every decade and deliver jobs and prosperity for the country’s poor. It sounds like a pipe dream considering our best ever growth period topped out in the mid-5% per annum range. And 7% seems miles away when we consider a mere 3.1% GDP forecast for 2011, growing to 3.4% next year and only 4% by 2015.
Gordhan doesn’t mince words. “To achieve this ambitious [GDP] target,” he says, “will require a deep rooted transformation of our economy to remove the many barriers to growth and development!” What would we have to do? The minister speaks of microeconomic reforms, increasing productivity and improving competitiveness… To achieve this we need to “raise the level of competition across industries and sectors, provide efficient and cost-effective energy, transport, ICT, and logistics networks, encourage innovation, foster entrepreneurship and enterprise development, and provide the platform for closer regional economic integration. The solution sounds so straightforward, but is near impossible to implement in practice.
“We live in challenging and uncertain times. There, are, however, many opportunities for us to advance to our goal for a better life for all in South Africa. This is a time for united action, for greater urgency, and for an unconditional focus on those programmes which will demonstrate to our people that we care and that we will change their lives for the better,” concludes Gordhan. We, like the minister, hope that this week’s action against errant ministers is the beginning of a genuine clampdown on corruption and incompetence. Imagine a South Africa where the R21bn in irregular, R3.8bn in unauthorised and R1.5bn in wasteful expenditure through 2010 was spent on social and infrastructure needs instead!
Editor’s thoughts: One of the issues we hoped Gordhan would tackle was National Health Insurance (NHI). But the MTBPS was short on detail, except to say that health spending would increase by 7.4% per annum over the next three years. We hope these increases – which just exceed inflation – are enough to transform the public healthcare sector into an NHI enabler. Were you impressed with Gordhan’s apparent tough stance on wasteful expenditure? Please add your comment below, or send it to [email protected]
Comments