With the right announcements the markets would react positively and support the government in seeking growth, writes Melanie Verwoerd
In anticipation of the budget I asked 20 senior people in the financial sector (asset managers, economists and bankers), what they thought was most needed in the budget speech to ensure a positive outcome for the economy.
Their responses differed very little and there were little surprises. It seems that macro-economics are not so complicated after all – well, that is if you can leave politics out of it.
So, Minister Mboweni, if you are still tweaking the speech, here are their top requests:
1) Urgent Structural reform is needed:
Overall there is an understanding that to get the economy on a healthy footing again, some politically unpopular decisions will have to be taken regarding structural reform. But as unpopular as they might be these decisions cannot be avoided and must be implemented with a sense of urgency.
2) Spending cuts – in particular the public sector wage bill:
As one asset manager put it, when asked his top 3 priorities: Austerity, austerity and austerity. Unsurprisingly there is huge concern about government spending.
Every person I spoke to raised the need to reduce government spending , in particular public sector wages. “Well for us, the most important thing is getting the budget to balance!
And the only way to do that now is to bring down operational expenditure and specifically the wage bill,” responded an investment specialist. (Some mentioned an amount of R150bn that could be saved by reducing wage packages.)
Yet, there is an understanding that the pain must be shared and that it can’t only be affecting the lower paid workers. “The public sector fat cats must also feel some pain” said one asset manager. “Personally, I would like to see teachers and nurses paid more, and cutting entitlements for political office bearers,” said another.
“What happened with the intention to reduce the size of cabinet and consolidate government departments?” asked an economist.
3) The “right” type of spending:
“It is not that we only need cuts, we also need to focus on restructuring current government spending,” said a senior economist. “What is required is less consumption spending and more fixed investment.” This was echoed by a number of responses which felt that “growth friendly infrastructure spending” was crucial.
4) An end to wasteful expenditure and corruption:
This goes without saying, but what is required, according to my respondents, is concrete evidence that wasteful expenditure is being curtailed. Equally so, legal action against those who looted the state coffers would build market and investor confidence.
5) No tax increases:
“Since SA has unequivocally already passed the peak of the Laffer Curve, the adjustment can only be through spending cuts, not higher taxes which would only weaken the economy further.”
This summarises the response across the board when it came to taxes. It was generally agreed that higher taxes would hurt the economy with no guarantee that the money would be spent wisely.
Despite some rumours that a VAT increase was on the cards, none of my respondents believed this to be a realistic option. “Even though it would secure valuable income for the government, it would be politically just too risky,” said one economist.
6) SOE reform:
Unsurprisingly the SOE’s are of major concern to all of my respondents. However, there is some disagreement on what steps should be taken.
The majority would like to see an end to bailouts for SOEs, a sale of non-core entities such as SAA and in general an acceleration of the privatisation of SOEs.
In the mean time clarity on the funding of these SOE’s is urgently required. A clear plan in the case of Eskom is needed as well as a heavy ramp-up of IPPs.
7) A few creative ideas:
A few ideas were put forward, such as using the UIF surplus to bolster the youth employment tax incentive, reducing transfer duties to jump start the housing market and an introduction of step rates for VAT on luxury goods.
Of course all these ideas come from people who are deeply entrenched in the market economy, though the majority are sensitive to the political challenges the President and Minister of Finance face.
“We are not asking for much”, said one political sensitive analyst laughingly.
Yet, they all agree that with the right announcements the markets would react positively and support the government in seeking growth.
With such unanimity among those who know their economics, one can only hope that Minister Mboweni will have the backbone to buck those who believe the fiscus is a bottomless El Dorado for big-spenders.
– Melanie Verwoerd is a former ANC MP and South African Ambassador to Ireland