There are alternatives to Treasury’s movement at a standstill

2018-10-26 16:46

With the economy in recession, unemployment at historically high levels and the after-shocks of state capture and policy drift under former President Jacob Zuma still weighing heavily on public services, the 2018 medium-term budget policy statement was an opportunity to provide a much-needed boost to the nation’s economy and confidence.

Though Minister Tito Mboweni presented some welcome tinkering around the edges, this was a mini-budget that contained no new vision or ideas for turning our ailing economy and social services around.

More of the same

A pro-poor budget is one that ensures the expansion of quality social services to the majority, while enhancing economic redistribution and growth in the most unequal country in the world

Yet after six years of “fiscal consolidation” that has starved public services, GDP continues to fall and debt continues to rise. This is in line with international experience and now globally accepted economic predictions: when you cut government spending and reduce people’s buying power during an economic downturn, you multiply the effects of that downturn.

Yet we continue to cut funding for critical public services. Throughout the country, departments of education and health, among others, have borne the brunt of static or declining real social expenditure per person, while low-income households have had to weather food price increases, a VAT hike and constant increases to the fuel levy.

Stimulus: what stimulus?

No additional spending was announced in the budget because the expenditure ceiling remains unchanged. Instead, R32 billion has been “reprioritised” over the three-year medium-term expenditure framework, R17 billion of which will be adjusted in the current year. These adjustments were paid for by drawing down on contingency funds (R14 billion) and programmes that were underperforming and/or underspending.

In the current year, R3.4 billion was shifted to pay for drought relief, R800 million for the school infrastructure backlogs grant, R625 million for the presidential infrastructure coordinating committee and R409 million for the commissions of inquiry into tax administration and state capture. Over the medium-term, a very welcome R1.3 billion was allocated to capacitate Sars and funds were also shifted to informal settlement upgrades.

However, these reprioritisations pale in comparison to the more than R8 billion that was allocated to bailouts for SAA, SA Express and the SA Post Office.

Let’s be clear: this is not a stimulus. In total, the R17 billion of reprioritisations equates to 0.01% of non-interest government expenditure.

A deepening of austerity

With about 0.3% per capita non-interest expenditure growth, the budget actually represents a deepening of austerity in the country.

This is because this meagre spending growth masks deteriorations in the budgets of many government departments and entities that have been starved of cash for several years.

Take the health and education sectors. Spending on public health per uninsured person is declining while real expenditure per school learner has fallen by 10% over the past 10 years.

Moreover, by refusing to allocate additional resources to cover the costs of public sector wage agreements, education and health departments have been forced to either use non-personnel budgets (such as for equipment or infrastructure maintenance) to pay for salaries, or to cut posts by implementing post freezes.

In education, this has resulted in school budgets being cut in most provinces. The poorest schools in KwaZulu-Natal, for example, have seen their budgets slashed by 15% over the past four years.

In health, the wealthiest province, Gauteng, has led the way in implementing post freezes on doctors, nurses and administrative staff. Even with such drastic measures, unpaid invoices by health departments continue to escalate to many billions of rands.

The knock-on effects of these budget shortfalls are obvious: deteriorating conditions in public hospitals and schools. Similarly, very little effort has been made to cushion poor households from the rising cost of living. Indeed, no explanation was provided in the medium-term budget policy statement for why the Treasury has ignored half of the recommendations of the panel of experts on VAT (nappies, school uniforms and bread will continue to attract value added taxes, while sanitary pads, bread and cake flour will not).

Smoke and mirrors

At the same time, a game of smoke and mirrors has been played to hide some of the more negative changes. For example, the medium-term budget policy statement announced an additional R800 million for school infrastructure, yet this pales in comparison to the more than R7 billion of cuts that were made to school infrastructure budgets in February of this year. Similarly in the health sector, the medium-term budget policy statement promises community health workers a minimum wage, but funds will only be made available to pay for this in 2021. In the meantime, the agreement made earlier this year to pay these critical public health servants a minimum wage remains an unfunded mandate for provinces. The effect of this will be that they will continue to live off paltry stipends of a few hundred rands a month for at least three more years.

Even more concerning, the linen, beds and additional healthcare workers promised by President Cyril Ramaphosa has been paid for by taking more than R500 million out of the indirect grant for National Health Insurance. One step forward in the building of NHI has again defaulted to two steps back.

The same is true of the public sector wage bill, where a perception is slowly being engineered by Treasury, fuelled by private sector economists who want to shrink the size of the state, that there are too many public servants and/or that their salaries are too high. Yet no research has been presented whatsoever on whether the size and cost of the public service is too high, too low or just right.

Indeed, following Mboweni’s comments, AfricaCheck issued a note showing that the minister was incorrect to say that R8 out of every R10 spent by government goes to civil servants: the real amount is R3.50 of every R10.

These are rands that do not exit the economy but, in fact, enable our civil service to fulfil the promises of the Constitution. Only on the basis of a reasoned discussion can calls be made on whether to increase or reduce the number or the salaries of public servants.

Is privatisation the answer?

Throughout his speech, Minister Mboweni echoed sentiments expressed by President Ramaphosa about enhancing the role of the private sector in public service delivery. This is being touted as a potential solution everywhere from health care to school sanitation to road building and airports. This raises several questions for which a public debate is now urgent.

Alternatives are within reach

There are alternatives to the continual undermining of the capacity of the state that is the result of budget cuts. Recently, a 12-month process of reporting and dialogue between the SA government and the United Nations Committee on Economic, Social and Cultural Rights culminated in some interesting observations and recommendations for SA by the Committee.

For example, it found that, despite being the most unequal country in the world, SA’s “fiscal policy, particularly relating to personal and corporate income taxes, capital gains and transaction taxes, inheritance tax, and property tax, do not enable it to mobilise the resources required to reduce such inequalities; and it is not sufficiently progressive to this end” and recommended fiscal policy to be reviewed accordingly. It also called on the SA government to “intensify its efforts to combat illicit financial flows and tax avoidance with a view to raising national revenues and increasing reliance on domestic resources.”

The committee chastised the government for pursuing cuts to social spending rather than exploring revenue raising measures such as these, and while not taking decisive steps to reduce irregular, fruitless and wasteful expenditure. It also called for the impact of the budget on women and other groups to be clarified.

Research and submissions to Parliament and the Treasury by the Budget Justice Coalition have also pointed to alternative strategies to grow the economy and restore public services.

These include showing that SA’s public debt, at less than 60% of GDP, is lower than the emerging market average and the advanced market average. Meanwhile, a recent report by the IMF shows that SA has one of the highest public wealth (relative to the size of its economy) in the world, higher than countries such as Germany and the US. This means that there is much more fiscal space for spending that would at least maintain levels of public service, than Treasury officials would have us believe.

Options also exist for utilising long-term investment funds, including through legislated vehicles such as the PIC, for long-term public investments in health, education and infrastructure, among others. This would result in much cheaper borrowing for government, saving us all money, while creating human and physical assets that will enrich society, to cover the cost.

We have also shown how personal tax subsidies such as for medical aid and pensions overly benefit middle and upper-class households (in the top three income deciles) and should be reprioritised towards poor and working class people, for example through increases to social grants and pensions.

Tax breaks and subsidies for the private sector also need to be reorganised towards the highest social and economic multiplying industries. For example, the vast bulk of subsidies and tax breaks currently go to the mining sector, which has among the lowest employment multipliers, whereas agriculture and community services, which have employment multipliers that are two to three times higher receive very little support.

A conversation also needs to be had about the role of the Reserve Bank in SA and whether our flexible exchange rate and ultra-orthodox monetary policy are hampering efforts to spur growth, job creation, exports and debt reduction (the medium-term budget policy statement attributes 70% of the increase in debt service costs since February to the depreciation of the rand against the dollar).

Looking forward

While some would like to weaken the Treasury so that the “will of the people” can have a greater influence on economic and fiscal policy, what really needs to be challenged is the mind-set of Treasury and the outsize influence of this mindset on government policy. Let’s have a debate about fiscal and economic options, not the institution itself or the role players within it. We will always have and need a Treasury as the custodian of the nation’s finances. The question is whether it is aligned to our developmental needs and constitutional values.

McLaren is the budget analyst at Section27

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May 19 2019