Godongwana stands his ground: will the cabinet stand with him?

POSTED ON: November 12, 2021 IN Blog

Finance minister Enoch Godongwana has stood his ground in the  2021 Medium Term Budget Policy Statement, charting a course to growth, employment and poverty reduction while maintaining financial stability. Success will depend on cabinet unifying on this agenda. Together they must strengthen leadership and state capability and extract more “bang for buck”.

The heavy lifting of budget cuts had been done in previous years. While overall expenditure is sustained at around R2.1 trillion annually, a funding gap has grown, fed by rising debt. Programme spending has had to make way for fast rising debt service costs.

There are some interesting choices made in this revised three year view which demonstrate a commitment to balancing the social and economic imperatives. Most interesting is a rebalancing of spending towards ‘community development’ (comprising water, housing, transport and local government) which has been allocated R38 billion more over the period. Economic infrastructure that is on-budget rises by R31 billion between 2021/2 and 2024/5. This marks real steps towards the long standing commitment of prioritising investment for growth and employment.

The Treasury has indicated that the fiscal framework largely depends on many non-financial actions that would strengthen the capacity to deliver. In turn, this requires significant commitment to modifying the modus operandi of the state – to strip out risk and leverage opportunity. As Minister of Finance, Godongwana may have the best chance of negotiating these given his experience in the ANC, labour and business and demonstrated capabilities in charting tough talks.

As he rightly notes, he is Minister of Finance and success will depend on the coalescing of cabinet around this agenda. There are signs of that happening.

Fostering growth over many decades will require sustainable state finances and consistent investment in human and physical capital. For government spending to have this impact there are at least four significant actions required – hard to do, but certainly within grasp (see NPC Economic Review 2020):

  1. Restore confidence in the budget process and commitment to a fiscal framework

Since 2017, Treasury has warned of domestic risks facing financial stability. These risks mainly relate to state capability and governance in revenue collection, municipal management, state owned enterprises, and public sector remuneration. There has also been a tendency to make significant financial announcements mid-year, outside of the budget process.

The chart below is one I have recreated over the years, of a building tsunami of debt. The challenge is not the level of debt, which is not outrageous by global standards. The problem is that the debt-to-GDP ratio ratchets up in every subsequent budget, indicating poor control over it.

Something interesting happened between February 2021 and the MTBPS: there was no material change to the forecast. The chart appears to show change, but that is because of the recalibration in response to GDP being rebased. This is the first budget statement since 2017 that has not really modified the debt outlook.

The tide of Government’s debt-to-GDP ratio

(Revision to February 2021 budget due to re-basing GDP)

2. Strengthen leadership, governance and capacity in municipalities and infrastructure state-owned-enterprises.

The State-Owned Enterprises are meant to offer government a vehicle for delivery of big infrastructure and off-balance sheet finance. Instead they have weighed heavily on the fiscus and have fallen short on delivery. Godongwana says a line has been drawn and there will be no more bail-outs. Indeed the MTBPS does not have the kinds of allocations to SOEs seen in recent years. We shall see what happens over time as Eskom traverses a Just Transition or PRASA tries to find its way back to fuller service.

The NPC’s report on SOE Performance highlights the need for better and stable appointments on SOE boards and executive management, transparent procurement, and the introduction of deeper public-private cooperation, most notably in energy procurement and port and rail lines.

In 2021/2, progress  will be marked by success in appointing a suitable board for Eskom, the creation of an ITSMO by ESKOM, progress in energy procurement, implementation of bid window 4 and 5 and fast track of transmission infrastructure, while also seeing the concessioning of rail and port facilities by Transnet.

At a municipal level, COGTA’s back to basics programme requires that the top six executives such as City Manager and CFO have certain capabilities. These must be applied to ensure there is sufficient leadership to chart to financial health and succeed in critical service delivery functions.

3. Chart public sector bargaining to a sustainable result.

The MTBPS allows for a 1% annual average increase in compensation. But this still needs to be negotiated. There is no new multi-year agreement yet in place.

And salaries are only one part of this.  In Godongwana, we may have the best chance of crafting a longer term strategy that aligns Treasury with DPSA and organised labour, balancing remuneration, performance, the right skill is matched into the job, and recalibrating staffing towards service delivery functions.

4. Attending to the immediate needs of very low income households, deserves special mention

Godongwana postponed any specific statement on support for unemployed adults.  Prior to the Covid pandemic, about 25% of households fell below the food poverty line.  It is likely worse now. These would generally be households with no working adults or marginally working. In a middle income country like South Africa, this depth of poverty cannot be allowed to persist – for both human rights and for long term development.

About 1.5 million jobs were lost in the pandemic, and those still out of work are mostly those with limited education and living in very low income households. There has been some bounce back but my initial calculations show that our employment levels may only revert to pre-covid levels by 2027 to 2030. That would set strict unemployment at about one-third of the labour force and broad unemployment over 40%.

Choices will have to be made – not just by Godongwana, and he notes these are choices that have to be made by cabinet. And no matter what is decided, it will never feel like it’s enough.

There are four essential ways of supporting this:

  • By allocating resources to activities that drive sustained growth and employment. This is ultimately the main way of attending to high unemployment and extensive poverty.

However, the sheer scale of unemployment and poverty says that there are many people that will simply not find or create work through market mechanisms in the next decade.

  • Enhancing the social wage in a way that reduces the cost of living, as indicated in an NPC report.
  • Creating public employment opportunities. The Presidential Employment Initiative is expected to generate over 550,000 employment opportunities in 2021/2 through special employment programmes at a cost of about R10.5bn.  This is in addition to the routine public employment programmes – the Expanded Public Employment Programmes, the Community Works Programme, the Jobs Fund and similar that in aggregate receive around R20 billion each year and create about one million work opportunities.  The majority of these are community oriented social services such as teachers’ aides, early childhood practitioners, health workers and similar.
  • A basic income support, which is, until March 2022, being offered in the form of the Social Relief of Distress R350 per month to adults that are not working and not receiving any other grant or bursary.  If extended for 12 months, it is estimated that it could cost R40 billion to R70 billion annually.

Godongwana is right to secure financial fuel for sustained economic and social advancement, and to remind us about the balancing act required. But the focus of attention seems to always be on how much is spent on current modes of delivery. We know well that there is substantial opportunity to deepen impact of every Rand spent. As commodity windfalls are unlikely in 2022, more pressure has to be exerted on performance whether through efficiency or new ways of working. BM/DM

Source: Daily Maverick