Finance Minister Malusi Gigaba will today deliver his maiden Medium-Term Budget Policy Statement (MTBPS). There is much at stake. Following the so-called ‘night of the long knives’ at the end of March, when President Jacob Zuma reshuffled his cabinet and sacked former Finance Minister Pravin Gordhan, there has been considerable consternation about the state of South Africa’s economy.
Gigaba has tried to reassure the business and investor communities that there would be no change in fiscal policy. However, since taking office, he has demonstrated little of that continuity and certainly none on curbing corruption and state capture. His 14-point plan was received, at best, with skepticism.
The key question for business now is whether Gigaba can demonstrate the necessary fiscal discipline and provide hope for the future in the run up to the 54th ANC National Elective Conference in December.
Business understands that South Africa is in trouble. My own organisation, Business Leadership South Africa, recently signed a contract with South Africa that commits to a better future of the country. Business stands ready to provide tangible support including, but not limited to, governance and human capital.
And business understands it should contribute its share as part of the social pact.
However, business should not be expected to make sacrifices and take the pain, specifically on tax increases, simply to help government close its fiscal gap. The government cannot make endless demands on business if it does not play its part in addressing the governance of State Owned Enterprises (SOEs), strengthening the public service with competent professionals, decisively rooting out corruption and state capture and providing policy certainty.
Worryingly, the reality looks to be the opposite. There have been fresh allegations of state capture related to the Public Investment Corporation (PIC) as well as another key state institution, the National Treasury, with parallel processes having been formed. These developments do not bode well for South Africa’s economy. It makes it harder for business to help and deters investors.
The crux of this MTBPS will be the revenue-shortfall and how it will be evaluated. Based on slow growth, revenue shortfall will be greater than R50 billion. The shortfall can be even higher, given the sluggish or no growth of the economy.
The central discussion is on how to close it. As always, increase in taxes will come first and the disposal of non-strategic assets. The specifics are normally left for February Budget, but this MTBPS may be an exception and a more detailed funding proposal could be spelt out.
There are various funding options to close the gap, varying from an increase in personal tax to creating another tax bracket for the wealthy to increase in company tax, increase in VAT and others. Other commentators are proposing a new tax on very wealthy properties. The dilemma for this government is that any proposal to raise tax to fund shortfall is likely to attract a backlash – and justifiably so.
This is not only because South Africans are tax-fatigued, but also because there is too much inefficiency, particularly in SOEs.
State capture is a self-inflicted project of Zuma’s government. You can’t convince South Africans that there is a need to close the revenue gap when there is no hope of closing it due to poor leadership and incompetence.
We have the state searching for more funds, yet two of our largest spending departments are education and healthcare, which spend more than middle-income countries as a percentage of gross domestic product, with worse-than-average results.
The real issue is the gross mismanagement of scarce resources. Improved management will achieve better results with the same spending, and the last thing we should be doing is looking for means to fund bad habits.
The largest single balance sheet in South Africa sits under state ownership, with a reported asset of R1.2 trillion in the Budget Review (2017).
However, this asset is being grossly mismanaged, with a return on asset that averaged just 3 percent per annum over the last five years, versus a cost of capital of 8 percent per annum over the same period. This represents an opportunity cost of 5 percentage of R1.2 trillion or R60 billion per year.
There is a tragic symmetry that this gap of R60 billion is almost exactly the budget shortfall. Add to this the observation that the return on asset for large publicly listed companies in South Africa stands at around 12 to 13 percent per annum and the lost income on state assets is in the order of R120 billion per annum.
Although the prospect for asset sale seems dim in the current political setting, there are at least two elements that bear consideration.
First, there is the prospect for PPP in which the state could enjoy “carry” in the management of state assets and the prospect of sale of under-utilised assets. The R1.2trln figure grossly understates the value of some assets and excludes others.
Land on the national balance sheet represents a material trapped asset. South Africa has a total surface area of 122 million hectares and approximately 30 million hectares (or 25 percent of that surface area) is in the hands of the State.
Moody’s and S&P Global Ratings are due to update their ratings towards the end of November and are likely to focus on SOE issues. Without substantial, tangible reforms – and show of unity amongst business, labour and government, further rating downgrades are inevitable.
To that end, BLSA calls upon Gigaba to seize the opportunity by creating a unity of purpose. MTBPS presents an opportunity to lay new structural reforms, necessary for attracting investment and uniting all key stakeholders who want a prosperous South Africa for all.
Business believes the solution lies in job creation through inclusive economic growth and restoring the integrity of state institutions. It stands ready to play its part. But the minister must create the right conditions and demonstrate government efforts to do the same.
Published in Business Report (25 October 2017)