We defeated the entropy.
24 November 2017 22:19 (South Africa)
Opinionista Oscar van Heerden

Desperate economic times call for desperate economic measures – and the time is now

  • Oscar van Heerden
    Oscar-van-Heerden.jpg
    Oscar van Heerden

    Oscar van Heerden is a scholar of International Relations (IR), where he focuses on International Political Economy, with an emphasis on Africa, and SADC in particular. He completed his PhD and Masters studies at the University of Cambridge (UK). His undergraduate studies were at Turfloop and Wits. He is an active fellow of the Mapungubwe Institute for Strategic Reflections (MISTRA) and is a trustee for the Kgalema Mothlante Foundation

After last week’s Medium-Term Budget Policy Statement it became apparent that desperate measures are required if we are to put South Africa’s economy on a path to real recovery.

In order to address the triple challenges (poverty, inequality and unemployment) facing our country’s government and corporate sector effectively, organised labour will have to do more and think out of the box to address these satisfactorily.

One crisp evening in 2016 while perusing books at Exclusive Books Hyde Park, I came across the launch of a book by Albie Sachs. As some of you might know, it’s always a great pleasure to listen to Justice Sachs talk about his illustrious career and political involvement during the dark days of the anti-apartheid struggle.

As I listened to him I did not notice that standing next to me was a very dear friend of mine. Since he works for National Treasury, and Pravin Gordhan was to deliver his Medium-Term Budget Policy Statement that week, I could not help but ask him what he thought the government could do to stem the tide of a ballooning deficit and national debt. I intimated that there are options such as raising personal income tax, increasing sin taxes, thinking about raising VAT, perhaps by 2% (which of course will negatively affect the poor), and finally, raising company taxes.

His answer, I must confess, surprised me: “Those taxes will of course make a difference but a very small difference. If we really want to make a significant impact and have a turnaround strategy, what would help greatly is a freeze on the public wage bill for a few years, perhaps three to five years in the medium term. That would save us billions.”

I found this answer most intriguing and really surprising for I had never spared a thought for such an option.

I recalled then listening to Minister Pravin Gordhan exactly a year ago when our economic outlook seemed equally dim. I recalled writing afterwards that he remained a fulcrum figure for us all and that he delivered a balancing act with poise and that it was a clear demonstration of what leadership constituted. There was an increase in social grants, albeit minuscule, another injection of billions for higher education. Our debt levels remained steady and a carbon and sugar tax was on its way to offset revenue shortfalls, among other measures. A clear commitment to keeping the public wage bill under 40% at all costs. All in all, at the time, a standing ovation was in order, for a balancing act of note.

The question in 2017, I ask, is can the same be said about Minister Malusi Gigaba’s policy statement?

I’m not convinced that a similar balancing act was attained this time around. Where I will give the minister credit is the honest and true depiction of the state of our public finances. This practice, Minister, is in keeping with the transparency doctrine that National Treasury, SARS and indeed South Africa have come to be known for internationally.

Now, when looking at Annexure A of the statement which outlines the fiscal risk statement, it is clear to me that we have to take some of those proposed measures very seriously.

It states for example that: “The current outlook is characterised by a deteriorating macroeconomic position over the medium term, severe revenue underperformance, expenditure pressures, and contingent liability risks that are beginning to crystallise. Sources of uncertainty include decisions on the scope of funding for higher education and the outcome of public-service wage negotiations.”

The statement goes further with regards to the public wage bill and states that: “Public-service wage negotiations – the shortfall in compensation budgets will deteriorate substantially if the public-service wage talks leads to an agreement that exceeds CPI inflation. For example, a CPI + 1 agreement would raise the national shortfall in 2018/19 to R8.2-billion, with the gap in provincial compensation budgets amounting to R4-billion. At this level, a three-year agreement would push the national shortfall to R11.8-billion by 2020/21, and provincial compensation spending would need to increase by R12.7-billion”.

Given the high levels of inequality and poverty in Mzansi, can we really justify such wage increases year on year?

On the current trajectory there will be CPI inflation increases every year but, with a ballooning expanded public service, we have to take the undesirable decision that a wage freeze is what is required, Minister. Other governments have taken these decisions and faced the consequences of their unpopular decision for the sake of the rest of the country.

What would happen if public servants considered the bigger national need, and took a one-year wage freeze? This would be for the greater good and the sake of our economy. Also, when looking at the State-owned Enterprises, it seems to me that the only way we will be able to get out of this one, besides having to deal effectively with corrupt practices, is by making money available so that debt levels again can be minimised. This is also clearly indicated in the annexure. It states that, “Government’s major explicit contingent liabilities are its guarantees. Total guarantees issued to public institutions, independent power producers and public-private partnerships stood at R688.8-billion in 2016/17. Total guarantee exposure was R445-billion, because several entities had not fully used their available guarantee facilities. Between 2011/12 and 2016/17, the combined profitability of the state-owned companies, measured by return-on-equity, declined from 7.5% to an estimated 0.2%. A growing portion of their operating expenditure is funded through debt. Lenders, alarmed by governance failures, are taking a more active stance.

As a result, state-owned companies are having difficulty raising debt, or are forced to refinance debt at higher rates. This situation creates liquidity challenges, leading to greater demands on the fiscus. Addressing this requires not only stabilisation measures at troubled entities, but a broader restructuring of state-owned companies and an acceleration of the reforms highlighted in recent editions of the Budget Review.”

To return to the public wage bill, it confirms that, since 2008/09, nominal GDP has grown at an annual average of 7.9% a year. Over the same period, spending on public-service compensation has grown at 10.3%.

It goes further, “Over the last decade, negotiated annual cost-of-living adjustments have exceeded Consumer Price Index (CPI) inflation by an average of 2%. In some years, this resulted from agreements set well above the prevailing inflation rate. At other times, lower-than-anticipated inflation has boosted the value of adjustments based on projections. For example, in the current year public servants received a cost-of-living adjustment of 7.3%, based on an inflation forecast of 6.3%. Inflation has now been revised down to 5%, implying an effective salary increase of CPI plus 2.3%.”

Did you know that if you have a 0% cost of living adjustment for just one year it would give you R25-billion. Then the following year you adjust the inflation-adjusted increment again. This once-off saving of R25-billion would be a saving year on year thereafter. Imagine what Treasury could do with reducing the deficit or debt or perhaps the contribution towards higher education, social grants or healthcare for children?

The combination of salary adjustments, improved benefits and upward progression has resulted in a large increase and equalisation in remuneration levels in the public service over the past decade. In 2016/17, nearly 461,000 public servants (37% of the total) earned more than R20,000 per month, up from 17%, or 199,000, in 2008/09. Just 17% earned less than R10,000 per month in 2016/17, compared with more than 35% of public servants in 2008/09.

Data from South African Revenue Service tax filings shows that public servants tend to receive higher remuneration than taxpayers in general at every point of the distribution up to the 90th percentile. While the income of the median taxpayer in 2014 was just under R100,000, the income of the median public servant was over R260,000. Only at the highest income levels do public servants earn less than the average taxpayer. Taxpayers in the 95th percentile earned about R682,000 compared with R563,000 earned by public servants in that percentile.”

Last, the income of public servants is more equally distributed than is the case for income-earners as a whole. The highest-paid 1% of public servants receive an income 23 times that of the lowest paid 1%. By comparison, the income of the top 1% of all taxpayers is 633 times more than the lowest 1%.”

In short, there remains huge inequality even from within the public service with salary discrepancies and the gaps being this huge. Surely this cannot be argued to stem the tide of inequality in our society?

Furthermore, when looking at the unemployment figures which conservatively according to the minister stands at about 27% when in fact we know that it’s bordering on almost 40%, it cannot be justified for the public service through their unions to insist on such wage increases.

Already our GDP per capita has declined for two consecutive years and as you may be aware, this is ultimately the measure being used to judge progress since 1994. The government has done very well with regards to delivery of the most basic services such as water, electricity and sanitation over the last two decades but this single most important phenomenon, the public wage bill. must be addressed urgently. We simply must make a significant dent in the national debt levels.

Will it upset the apple cart and the relations the governing party enjoys with one of its alliance partners? No doubt it will put strain on such relations but for the greater good this must happen.

It must also happen because if you are an ardent supporter of social grants, such as I am, then again I argue for this desperate measure to be effected because, as the statement also indicates, “Spending on social grants is driven by changes in the number of grant recipients and grant values. The baseline scenario projects that the number of grant recipients will grow from 17.3-million in the current year to 23.5-million recipients by 2030/31, with grant values increasing in line with CPI inflation. In the baseline growth scenario, social grants rise from 3.3% of GDP to a peak of 3.5% in 2030, before declining slowly thereafter. Even in the low-growth scenario, grant expenditure is projected to peak at 3.8% of GDP.”

I repeat, with growing inequality, unemployment and poverty levels surely the morally correct decision would be to at least consider very strongly the option of freezing the public wage bill and at the same time argue for the consolidation of our social grants systems for the most vulnerable people among all of us.

As the minister so correctly intimated through the poem at the beginning of his speech, “You cannot remake the world without remaking yourself.”

Desperate times calls for desperate measures, now is the time to act, for history will judge us harshly. DM

  • Oscar van Heerden
    Oscar-van-Heerden.jpg
    Oscar van Heerden

    Oscar van Heerden is a scholar of International Relations (IR), where he focuses on International Political Economy, with an emphasis on Africa, and SADC in particular. He completed his PhD and Masters studies at the University of Cambridge (UK). His undergraduate studies were at Turfloop and Wits. He is an active fellow of the Mapungubwe Institute for Strategic Reflections (MISTRA) and is a trustee for the Kgalema Mothlante Foundation

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