In defence of Treasury’s plan to grow the economy, Finance Minister Tito Mboweni warned the African National Congress National Executive Committee (NEC) that government’s choices are becoming starker, and that urgent changes are needed.
In Mboweni’s presentation, during the third day of the NEC’s conference in Benoni, he said growth is faltering and tax revenue has disappointed despite tax hikes, including the VAT increase.
In a weak economy, Mboweni said, businesses are struggling to cope with the higher tax burden and South Africa’s lack of competitiveness. He said the outlook for growth has worsened significantly since the February Budget, and that growth is likely to remain below 2% “for at least the next two years”.
Weak economic growth
“Slow progress to date on structural reforms means growth will remain low,” Mboweni said in his presentation, which has been leaked to Fin24.
Mboweni said that state-owned enterprises (SOEs), e-tolls, the National Health Insurance and the Road Accident Fund are all placing demands on government finances.
He warned that SOEs posed a “massive risk to economic stability and fiscal sustainability”, with Eskom’s total debt now the equivalent to 9% of GDP – the same size as the mining and agriculture sectors combined.
In a low growth environment, fiscal choices are become starker, Mboweni warned. A reliance on tax increases, and more government spending (particularly on civil servant wages), will hit growth.
"If no corrections occur, in a slow growth environment, we face even greater adjustments in three years’ time."
Mboweni also said that there is a lack of accountability for ministers, and that their performance agreements are based on outcomes that are “poorly conceived”, with “no actions taken against officials or ministers". In his presentation, he also cast doubt on government’s cluster system.
Mboweni defended Treasury’s policy discussion document on growth, released last month, which proposes increased support for exports, agriculture and tourism among many other initiatives. The ANC’s alliance partners, including Cosatu, have attacked the plan.
But in his presentation on Sunday, he reiterated many of the more controversial aspects of the plan, including:
Selling state-owned companies
Mboweni said that government should “stop subsidising inefficient SOCs [state-owned companies] to deliver services more effectively done by someone else and sell SOCs that have no clear public service mandate".
Previously, Mboweni mooted the sale of SAA, as well as Eskom’s coal-fired power stations.
He blasted wasteful SOE expenditure, including large overruns on infrastructure projects and very high wages for senior officials.
Mboweni said SA's SOEs have unsustainable revenue models, with "high prices reducing demand and a culture of non-payment becoming entrenched", and as well as unsustainable cost bases ("wasteful expenditure; large overruns on infrastructure; very high wages for senior officials”) and insufficient accountability (“government not enforcing shareholder discipline; board of governors not appropriate”).
Mboweni said that major SOEs are abusing their monopoly position, but there isn’t yet resolution whether more competition or better regulation would help solve it.
Curbing collective bargaining
Collective bargaining agreements are favouring big business and big labour to the detriment of the unemployed and small business, Mboweni said. Treasury wants small businesses to be exempted from industry wage agreements.
The finance minster also warned that the national minimum wage is increasing the cost of doing business in SA.
“Global competition for low-skilled work is intensifying and SA’s unskilled labour is expensive.”
The bottom end of the labour market is being helped with the minimum wage, while highly skilled workers are getting paid well because of a lack of skills.
“However, workers in medium-skilled jobs, the informal sector, [and] technology-sensitive jobs have seen [a] decline in the growth of their real earnings.”
Promote high-skilled immigration
Mboweni said that high-skilled immigration should be promoted through an “improved immigration framework”.
More private competitors for Eskom, Transnet
A key action that government should take is to "boost competition in key economic sectors e.g. energy and transport", Mboweni said in his presentation.
This corresponds with Treasury's proposal to grant private companies access to the core rail network.
Treasury's growth plan also proposed that households and companies should be allowed to sell the excess electricity they generate through rooftop solar PV systems. Companies should also get access to the electricity grid by allowing more “wheeling of electricity” – this means that companies can build their own power stations and then use the national grid to transport the electricity.
The plan also proposed that Eskom should sell its coal-fired power stations, with an agreement that it will buy back the electricity at a predetermined tariff.
Helping agriculture and tourism
In his presentation, Mboweni focused on Treasury’s proposed policy changes that could boost two labour intensive industries, agriculture and tourism:
He punted more involvement from the private sector to improve water distribution infrastructure and revitalise unproductive irrigation schemes, and included other initiatives to improve sanitary and phytosanitary standards and veterinary protocols, that could help SA products in key export markets in the short term. The impact of these and other initiatives could unlock 35 000ha of high-value fruit production and generate additional R6bn in exports, he said.
Every R1m increase in demand for tourism services or products creates about 4 new jobs and output rises by R1.4m on average, Mboweni said.
To help the industry, regulations on the travel of minors should be addressed. New regulations were published in November 2018, but the “risk-based verification methods at ports of entry are still problematic”, Mboweni said.
He also proposed reviewing the list of countries requiring visas to enter South Africa to ensure “big tourist sources” can come to SA easily. “State Security (is) still to provide profiles of these countries before finalisation,” according to his presentation. Mboweni also wants visa requirements for highly skilled foreigners to be revised.
Mboweni expanded on government's "five pillars to promote inclusive growth":
1. Re-imagined industrial strategy.
This should include "more experimentation and piloting of industrial policy options through more effective use of well functioning and rationalised Special Economic Zones".
2. Infrastructure Fund
Government wants to leverage increased funding from international financing institutions and long-term private sector investors to ramp up infrastructure investment.
"Blended-finance projects will create a conducive environment for the participation of the private sector," Mboweni said. Government has previously set aside R100bn to establish the Infrastructure Fund.
3. Improve the ease of doing business
The testing of “automation processes” at the Companies and Intellectual Property Commission (CIPC), SARS, the Unemployment Insurance Fund (UIF) and Compensation Fund are underway, Mboweni said. The process to store deeds electronically is also being finalised. Construction permits should also be easier to get. Transnet should improve logistics at Durban Port given the constraints on container handling capacity, and reduce port handling charges
4. Supporting small business and competition
Mboweni reiterated a plan to consolidate all SMME funding under a single authority. Entrepreneurs should be helped to register a new business and apply for local and national government permits in a easier, simplified manner.
5. Strengthen SA’s macro-economic framework
Mboweni said government should urgently restore fiscal sustainability. Spending pressures, the state wage bill, difficulties in demonstrating control over SOEs are contribute to high debt levels, which is making it more difficult to attract capital and borrow at affordable rates.
"Volatility as a result of policy uncertainty (is) primarily expressed through the rand, but also expressed as higher perceptions of riskiness (higher risk premia, higher bond yields, higher credit default swap spreads, higher risk of ratings downgrades)."
He also suggested the creation of a new National Bureau of Economic Research to improve the quality of policy advice, and confirmed plans for a Sovereign Wealth Fund.