Bitter medicine: paying the costs of state capture

2019-02-22 15:30

Finance Minister Tito Mboweni walked into Parliament for his 2019 budget speech carrying an aloe ferox plant.

He said: “This is one of the best known South African plants. It has a long history of medicinal use. It is resilient, sturdy and drought resistant. It withstands the elements.”

Minister Mboweni continued to deliver the entire speech with this plant beside him, invoking with its presence, a call to sow the seeds of renewal and growth.

In this 2019 budget, the effects of state capture in previous years hit home. State capture is more than isolated cases of opportunistic corruption. It entails a well-organised network of people deliberately redefining the way institutions function in order to redirect power and funds for personal enrichment.

Allow me to remind you that in 2016, Eskom awarded McKinsey and Trillian contracts which have been argued were unlawful. The payments amounted to R1.6 billion. Remember also that taxpayers picked up the bill for the Gupta wedding and the revelations at the Zondo Commission have implicated Bosasa in massive corruption and systemic state capture. Beyond the revelations, there must be accountability and consequences.

Budget 2019 is a budget in which we have seen R75.3 billion allocated over the next three years for the restructuring of Eskom. The contingency reserve, the “rainy day” reserve that can be drawn upon if necessary, was increased by R6 billion to respond to requests of fiscal support from smaller state-owned entities. In this budget, state-owned entities have placed significant spending demands on the fiscus. The Zondo Commission has made the effects of the capture of state institutions evident, where state-owned entities were particularly targeted.

We then heard that revenue collection had come in at R15.4 billion below the estimate that was set and that about half of this could be attributed to the revenue service needing to deal with a backlog of VAT refunds. Not only has this contributed to a budget deficit, the delays in paying VAT refunds have impacted on small businesses.

Fiscal policy refers to the overall levels of tax, borrowing and spending. Public expenditure is dependent on the government’s ability to raise funds. Governments typically do so through revenue from taxation or by borrowing. When government sets its fiscal policy, it should do so by aligning all decisions relating to its tax rates, borrowing levels and spending levels to its constitutional and policy obligations. As a result, the impact that these decisions have on economic, social and environmental development are no trivial matter.

The level of revenue generated through taxation was not sufficient to cover spending requirements in the 2019/20 financial year. As a result, Treasury was left with a budget deficit to balance in an ailing economy.

To address this, it opted for the route of a combination of spending cuts, borrowing and some modest tax measures. Spending cuts of R50.3 billion were proposed. However, at the same time, the expenditure ceiling (meant to reassure investors that there will be a limit to government spending) was increased. This is because of the R75.3 billion of funds earmarked for Eskom.

Looming elections are probably the reason the budget was balanced largely by increasing borrowing.

Our gross debt forecast is therefore now expected to reach 60.2% of gross domestic product. On the tax side, we saw the use of bracket creep in terms of personal income tax, the introduction of carbon tax, which will be implemented by 0June 1 2019, and more fuel price hikes. We also saw increases in sin taxes in the form of alcohol and tobacco excise duties increases.

Perhaps, given the times we are in, these were the only choices to be made. The crises at the state-owned entities could not be left unattended. We could say that this is some of the bitter medicine of the aloe ferox plant that Mboweni spoke of.

If one digs a little deeper into the details of the 898-page Estimates of National Expenditure document, what emerges is a sense of what has been sacrificed to pay the costs of state capture. The reason the minister and treasury’s choices were limited, in the view of the treasury, is because similar to what happened in 2018, a large spending requirement emerged at the last minute. In 2018, the spending requirement was to fund fee-free tertiary education. A policy and fiscal decision that, given our developmental needs, could have been welcomed and implemented responsibly. Unfortunately, due to last-minute political interference, Treasury was left searching to find a solution for fee-free tertiary education while addressing the crisis at SAA and Eskom. By then the engagements between national treasury and departments in which the spending cuts were deliberated upon had been concluded. That left treasury searching to find a revenue side solution, which in 2018 was comprised mostly of revenue generated through a VAT increase.

In 2019, once again, a large spending requirement in the form of the allocation required for Eskom and other state-owned entities emerged at the last minute. Once again, that left only a revenue side solution and due to the nature of budget choices in an election year, we see that borrowing accounted for most of the solution.

The timing of these large spending requirements has left the treasury with limited and unpopular choices to make. It can be argued that some of this is due to a context of a continued lack of policy coherence from government that is impacting on economic growth and development.

Importantly, we have very little information about the conditions of this borrowing or the debt that Eskom already has and what it really means for our economy. For where there is a debt there is a creditor waiting for it to be paid, usually with interest.

To unpack the effects of the spending cuts and who that cost accrues to, one must look at where they come from. The minister of finance has explained that 54% of the spending reductions (of R50.3 billion), comes from public sector wage bill adjustments.

The minister explained that older public servants will be allowed to retire early. In other words, at a time of crisis, because of a state capture induced budget deficit that needed to be plugged, we are going to be saying good bye to the most experienced officials in the public service…

Let that sink in.

At a time when we need experienced hands to stay the course, we will be losing those officials. Those over 55 who have been worn down by the frustrations of withstanding toxic workplace cultures may be quite relieved to take this option. But the question is, do we want to lose experienced officials in education, health and social development?

It can be argued that the impact of this is that it will play out in the form of worsening service delivery to citizens. Previous voluntary severance package options have had exactly that result. Has sufficient attention been paid to what it means in the long term if our social services don’t have the staff and resources to do their work effectively?

The rest of the compensation adjustments come from natural attrition, which means that when an official leaves, that post doesn’t get filled. We already have a difficulty of key positions not being filled, which also impacts on service delivery.

The phenomenon of unfilled key vacancies, such as chief financial officer, is problematic. Work goes undone or other officials have to work extra in acting roles to make up for roles not being filled. This does not help to build a capable state and strong institutions.

Then there are specific programmes which got chopped. These reductions over the three-year medium-term expenditure framework are R12.8 billion from the agricultural land holding account: land reform, R1 billion from land restitution grants, R5 billion from transfers to the special defence force, R3 billion from the human settlements grant, R2.3 billion from Prasa and R500 million from the integrated national electrification programme.

A particularly disturbing cut is the delay in implementing the extended child support grant, to support orphans who are being cared for by grandmothers. We cut R1 billion and took it from orphaned children and grandmothers.

Treasury outlines that “these changes respond to weak economic performance and revenue outcomes, as well as the reconfiguration of Eskom”.

At a time when the 2018 South African Child Gauge report revealed that 7 million children in South Africa live below the food poverty line, we took R1 billion out of the mouths of orphans.

In the October 2018 medium-term budget policy speech statement, Mboweni quoted a Tale of Two Cities by Charles Dickens. This time, he said that the Oliver Twist quote, “please Sir, may I have some more” might be more appropriate. He then continued immediately to speak about state-owned entities that pose very serious risks to the fiscal framework.

Mboweni, are you aware that Oliver Twist was an orphan and not a large parastatal ravaged by the effects of state capture?

State capture has taken food from the mouths of orphans. To this, may we say never, never and never again…

Kirsten Pearson is a coordinator at the Budget Justice Coalition

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January 12 2020