Mboweni – ready for tough decisions?

Mboweni – ready for tough decisions?

Alternative Information & Development Centre | 29 October 2019

On the eve of Finance Minister Tito Mboweni’s second mid-term budget speech in office the writings on the wall. If the latest Medium-term expenditure framework and the Mboweni strategy for economic growth document are indicators of what’s to come, then we can expect budget cuts and the dream of an export-oriented growth path. 

South Africa is in a high unemployment and inequality trap. With more than 10,2 million unemployed people, at approximately 40% of the labour force, unemployment should be declared a national disaster. Growth is stagnant and inequality is rising. More than half the population manages to survive on less than R1200 per month, with many South Africans not having sufficient food and some dying of hunger each year.  

Investment in the real economy as a percentage of GDP has reached its lowest level since 2008. The investment that is taking place is predominantly in the financial sector that doesn’t produce sufficient jobs. South Africa’s JSE is valued at more than 260% of the country’s GDP. At over 260% the South African JSE is the highest in the world. It is highly overvalued and simply unsustainable, this spells disaster. 

High unemployment, coupled with declining real wages means that the country’s household consumption is driven by credit. Currently, South Africa’s household debt as a percentage of disposable income is concerningly high – at a ratio of more than 70% of disposable income – with consumers spending just under 10% (on average) of disposable income on servicing their debt. 

South Africa also has a growing state-owned enterprise debt problem with Eskom at the pinnacle. The country regularly experiences load-shedding due to the energy utilities capacity problems. These problems are not easily solved given R450 billion in debt, of which half needs to be immediately removed from the Eskom balance sheet.

At the same time South Africans and workers lose billions of Rands each year as a result of illicit financial flows. South Africa is one of the biggest losers in relation to profit shifting, but it’s really workers who lose – because the biggest chunk of profit shifting is in fact wage evasion. Moreover, there is R1,5 trillion in idle assets due to South African companies are accumulating reserves and not investing in the economy. Not to mention surpluses at the Unemployment Insurance Funds (UIF) – R8 billion – and the Government Employees Pension Fund (GEPF) – close to R50 billion – each year. 

It is in this context that the MTBPS is being delivered on Wednesday, 30 October 2019. The three-year budget plan from the Treasury in July would cut the government’s non-interest spending in the next budget by about 3.4 percent in real terms, i.e. after taking inflation into account. Government spending comprises almost a third of GDP. So, a real cut of 3.4% is the equivalent of a more than 1% cut from GDP. This will result in the further contraction of the South African economy and the poor will end up paying the price. 

These policies have not only failed to reduce unemployment and inequality in South Africa over the past 25 years, they also have not worked anywhere else in the world. Therefore it is critical that the finance minister and government breaks from tired policies that have only served to exacerbate unemployment and inequality in South Africa.

Here are five concrete proposals for Finance Minister Mboweni:

1 – Declare unemployment a national disaster and place a moratorium on all retrenchments 

South Africans can no longer afford to lose jobs. The unemployment rate in the Great Depression was 25%, at close to 40% unemployment South Africa is experiencing an unprecedented jobs crisis. This is linked to the massive de-industrialisation of the South African economy post-1994. Government must place a moratorium on all retrenchments, and fix the economy through the implementation of a re-industrialisation programme.

2 – Eskom is in crisis but don’t privatise it

Eskom must be transformed but this does not mean that it must be privatised. Privatisation of Eksom will mean more job losses and increased electricity prices. Furthermore, Eskom must remain a public utility in order to oversee the rollout of a massive socially owned renewable energy programme. This will also require: 

  • An import substitution policy for South Africa to develop a local renewable energy manufacturing industry. This is critical as this is where the bulk of the jobs are. Where possible, workers in fossil fuels jobs must be re-trained and re-skilled to work in renewables.
  • A grant guaranteed for every worker who will not be able to be reskilled and will therefore lose their jobs in the transition from fossil fuels to renewable energy.

3 – Bailout Eskom using the surpluses of the government employees pension fund (GEPF)

GEPF is a main creditor of both the government and Eskom. With a contribution holiday, the R1.8tn in the GEPF’s fund would decrease by R25bn, other things being equal. The contribution holiday would pose no threat to the guaranteed pension and benefit payments to state employees and their spouses.The surplus after paying all pensions and benefits amounted to R47.5bn in 2018. An additional R100 bn can be borrowed to Eskom at a zero percent interest rate. 

4 – A fiscal and social stimulus programme

The state must use its political and economic weight to lead investment into key sectors of the economy including education, health care and must fast-track investment into infrastructure particularly renewables where massive amounts of jobs can be created. There are already concrete examples of this, such as the Green New Deal and the One Million Climate Jobs Campaign. 

Simultaneously it’s a travesty that people die from hunger every year. Given massive unemployment and inequality – particularly among working class youth – means that people desperately require more resources right now, just in order to survive. Bolstering the social security system by including a basic income grant that gets rolled out for unemployed 18 to 35 year olds will massively reduce absolute poverty and hunger.

5 – Raise revenue by: 

  • Combatting profit shifting and wage evasion, including the implementation of anti-tax avoidance legislation and more capacity for SARS and other important statutory bodies. The scale of profit shifting varies but what’s indisputable is that South Africa is one of the biggest losers and that South Africa loses tens of billions of rand to profit shifting and wage evasion each year. 
  • Eradicating corruption, procurement policy as well as end wasteful and irregular expenditures. This alone can save South Africa billions of Rand each year. The Auditor General alone has pointed to R60 billion in wasteful and irregular spending in the public sector last year. Corporate overcharging of municipalities and provinces must stop.
  • Using public finance & prescribed assets for investment. For example, liberate R200 billion from the GEPF’s R1,8 tn. The GEPF is currently valued at 108% “funded”. According to the law governs the GEPF it can be 90% “funded”. This means that more than R300 billion can be used from the GEPF without putting the pension fund at risk, according to the law. Pensions would be safe too because the income from investments plus the contributions received exceed benefits paid by close to R50 billion per year. This does not mean that pension money can just deposited into a black hole. The use of the GEPF to finance of Eskom should come with conditions to transform Eskom to serve the interests of the workers and the general public. Trade union representatives must have seats at the Eskom Board. 
  • Increased taxation on corporations and high net worth individuals, including a wealth tax. Since 1985 the average global corporate income tax rate has dropped by more than half. This has resulted in tax frameworks becoming increasingly regressive. South Africa is no different. The corporate income tax rate has fallen from close to 50% in the early 1990s to 28% today. It would be important to increase the statutory corporate tax rate, at least to early 2000s levels of 35%.
  • Public audit of South African debt, and the scrapping of illegal debts. For example, the $3.75 billion Eskom loan from the World Bank in 2010 for supposed promotion of renewable should be scrapped. Today this loan comprises 5% of Eskom’s debt. Given the overwhelming evidence of corruption and environmental degradation fostered through the World Bank’s 2010 loan to Eskom, the grounds for scrapping the debt are firm. 

The state of the South African economy has moved far beyond the business-as-usual trajectory our government is currently pursuing. Our economic malaise calls for a departure from the status quo that takes a sober look at the alternatives at our disposal. The proposals above are but a few in the options our government can take forward as opposed to the current austerity measures on offer.

History is the accumulation of various moments over time. Sometimes there is a tipping point where new paths can be chartered. This MTBPS is one such tipping point or moment. It is at moments like these where radical departures from the status quo are necessary. Minister Mboweni must take bold action, part of this includes a commitment from the state to invest in low-carbon re-industrialisation programme. 

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