8 November 2017

South Africa: Time for a Comprehensive Spending Review

press release

The following speech was delivered by the DA Shadow Minister of Finance, David Maynier MP, during the debate on the 2017 Revised Fiscal Framework in the National Assembly today.

1. Introduction

The Minister of Finance, Malusi Gigaba, revealed the full horror of President Jacob Zuma's disastrous mismanagement of the economy when he delivered his medium-term budget policy statement two weeks ago in Parliament.

2. Budget Blowout

The minister tabled the revised fiscal framework during his medium-term budget policy statement, which exposed a full-scale budget "blowout" in 2017/18.

The hard facts are as follows:

- economic growth: down by 0.6% from 1.3% to 0.7%;

- revenue: down by R50.8 billion from R1.41 trillion to R1.36 trillion;

- expenditure: up by R3.5 billion from R1.563 trillion to R1.566 trillion;

- fiscal deficit: up by R54 billion from R149 billion to R203 billion;

- national debt: up by R300 billion from R2.23 trillion to R2.53 trillion; and

- debt service costs: up by R900 million from R162.4 billion to R163.3 billion.

The budget blowout was caused principally by a R10 billion bailout of zombie state-owned enterprise, South African Airways.

The minister is now drowning in red ink and has been forced to sell the family silver to hold the fiscal line in 2017/18.

3. Scary Facts

The fact is:

- the R50.8 billion revenue shortfall is the biggest revenue shortfall since the global financial meltdown in 2008/09;

- to avoid a breach of the expenditure ceiling about R3.9 billion worth of Telkom shares will have to be sold;

- the R6 billion contingency reserve has been wiped out despite the fact that funds may well be required to assist with flood damage and drought relief;

- debt service costs are the fastest growing item of expenditure in the budget, consuming 13.7 cents of every rand collected in revenue; and

- we will spend more this year on debt service costs (R163.3 billion) than we will spend on police (R93.7 billion) and higher education (R76.7 billion).

These numbers are staggering and they are terrifying.

4. Full Horror

However, the full horror of the budget blowout is revealed when one considers the primary balance, which is the difference between total revenue and total non-interest expenditure.

The deficit in the primary balance is set to widen by R51.9 billion from R4.4 billion to R56.3 billion in 2017/18.

What this means is that we are now borrowing money to pay the interest on borrowed money.

Or, put simply: we are using our credit card to pay the interest on our overdraft in South Africa.

5. Comprehensive Spending Review

The situation we now confront is serious and is described as the biggest fiscal crisis since the global economic meltdown in 2008/09 hit South Africa.

We are going to have to take some big, bold, tough decisions to solve the fiscal equation, especially on the expenditure side of things.

That is why we have proposed a Comprehensive Spending Review aimed at reviewing the composition of spending, efficiency of spending and future spending priorities with a view to cutting spending, and changing the composition of spending.

A Comprehensive Spending Review would be geared towards making hard decisions about spending cuts that could be sustained by, for example:

- reducing the size of the executive to approximately 15 ministries, which could save an estimated R4.6 billion per year, or a total of R13.8 billion between 2018/19 and 2020/21; and

- running the provincial legislatures more efficiently, which could save an estimated R1.8 billion in 2018/19, R1.9 billion in 2019/20 and R2.0 billion in 2020/21, or a total of R R5.5 billion between 2018/19 and 2020/21.

However, in the end if we are going to get serious about cutting spending we will have to confront the ballooning cost of "compensation of employees", which is projected to cost R1.9 trillion, and which is projected to grow at 7.3%, between 2018/19 and 2020/21.

Consider the following:

- a freeze on the salaries of senior management who earn more than R918 000 per year, and who are employed on salary levels 13 to 16 in general government, could save an estimated R1.2 billion in 2018/19, R2.0 billion in 2019/20 and R2.8 billion in 2020/21, or a total of R6 billion between 2018/19 and 2020/21; or

- a freeze on the salaries of all employees in general government could save an estimated R57.8 billion in 2018/19, R92.7 billion in 2019/20 and R129.1 billion in 2020/21, or a total of R279.7 billion between 2018/19 and 2020/21.

Whatever the case, savings identified as a result of a Comprehensive Spending Review could be allocated:

- to hold the fiscal line on social protection and to fund investment in infrastructure and skills development to support economic growth; and

- to cut the fiscal deficit in order to reduce national debt and debt-service costs over the medium term between 2018/19 and 2020/21.

6. Conclusion

The fact is that in the end Comprehensive Spending Reviews have proved to be successful in Australia (Comprehensive Spending Review 2010), Canada (Strategic and Operating Review 2011), and the United Kingdom (Comprehensive Spending Review 2010).

And if the minister is serious about dealing with the fiscal crisis, he would give serious consideration to implementing a Comprehensive Spending Review in South Africa.

But, in the end, let no one forget that President Jacob Zuma and his disastrous management of the economy is responsible for the fiscal crisis in South Africa.

David Maynier MP

DA Shadow Minister of Finance

South Africa

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