SONA and Budget 2023: What government can do for South Africa

The South African Reserve Bank’s decision to raise interest rates for the eighth consecutive occasion is a reminder that we, and much of the globe, are still in the throes of a cost-of-living crisis sparked by events in Russia and Ukraine a year ago this month, as well as events in China which are now thankfully receding. The quantum of the rate increase, 25 basis points; as opposed to the 50 basis points favoured by some members of the Monetary Policy Committee, suggests that South Africa may be over the worst of the crisis.

This however does not change South Africa’s poor growth outlook, which the Reserve Bank now expects to slow from 2,5% in 2022 to 0,3% this year; and signals that consumers and businesses are facing a tough economic environment. Over the next month, government will outline its plans through the State of the Nation Address (SONA) and the National Budget speech and would need to respond to several challenges. Key among these is the improvement of efficiencies to boost economic function and contain price increases.

South Africa has used inflation targeting to tame inflation since February 2000 with reasonable success however, the best way to achieve low inflation in the long term is to improve the efficiency of the logistics and supply chains in the economy. The best thing that government can do for households and businesses in the year ahead, is to help contain price increases and lower the cost of doing business in order to preserve jobs. This requires both short- and long-term interventions, actions that can be taken this year and over the next few years to address long term challenges.

Government needs to ensure reliable and affordable energy supply and to lower the cost of logistics, which means addressing the problems at the impacted state-owned enterprises (SOEs), Eskom and Transnet. Beyond this, ithas to contain the rise in administered prices, from municipal to postal services and ensure affordable telecommunication services through low data costs.At the moment, the private sector is addressing some of these ailments, forexample: private courier services stepping in where postal services have collapsed and mobile network operators with strong regulation, deliveringaffordable data services.

Fixing Eskom’s financial position means addressing its debt challenges, including municipal debt and maintaining cost reflective tariffs.  Eskom’s coal fleet, including Medupi and Kusile power stations, need to function optimally for the duration of the plants’ lifecycle while South Africa installs renewable, gas and battery storage technology for the long term. We have to fix what we have before adding anything new.

Revenue collection has been one of the key pillars of success in South Africa’s democracy. The reform and repositioning of the South African Revenue Service (SARS) 26 years ago brought about an institution that has been a centre of excellence in the public service, accompanied by improved collection as well as tax morality and compliance. Efficient revenue collection has enabled a new democratic government to fulfil its many functions to a broader, previously excluded, base of the population. Most importantly, it has enabled South Africa to establish and maintain the most comprehensive social wage in the developing world: comprising social grants, free and subsidised housing, no fee schools and free basic services. This has been essential in maintaining social stability in the face of high unemployment.

Government’s challenge in the current economic environment should be to protect the tax base of those in employment and paying tax as well as those paying VAT through consumption. The aim should be to improve consumer’sdisposable income, even if temporarily, through a range of tax measures. These tax measures could include the temporary suspension of the fuel levy, adjusting personal income tax brackets and broadening the range of zero-rated goods to include items such as bottled water, which have ceased to be a luxury and become a necessity in the face of water supply challenges partly due toloadshedding.

Now SARS faces the challenge of accelerating its modernisation and digitalisation journey in order to maintain its performance, introduce innovation such as collecting revenue at source, keep pace with South Africa’s middle income country peers, and respond to measures proposed by  the Organisation for Economic Co-operation Development (OECD) in its report on the South African economy, which include possible reduction in the VAT rate in order to stimulate economic growth.

2023 marks seven years left for the country to realise the National Development Plan goals. Among these was the creation of 11 million jobs as well as the creation of a capable state. The latter goal is now mired in a debateabout the size and configuration of the public service as well as the Public Service Wage Bill. Part of creating a capable state entails the creation of a digitised, data driven and climate resilient government. This is a government that can achieve seamless service delivery and respond to extreme weather events, like floods and wildfires, to protect public infrastructure. The debate around the wage bill of the civil service is essentially one about value for money. A digitised government can deliver this value.

It has been two and half years since the July 2020 emergency budget which had to be adopted to reprioritise spending in the wake of the COVID-19 pandemic. Healthcare received additional resources for obvious reasons. The coming budget must demonstrate how far government has gone to recalibrate healthcare spending to prioritise other public health emergencies including TB and HIV/ Aids, teenage pregnancies and South Africa’s quadruple burden of disease that includes trauma and lifestyle diseases.

The pandemic also showed the need to strengthen the public health system to prepare for future pandemics. Budget allocations to the National Health Insurance (NHI) will reflect the urgency of implementing NHI in the year that its bill is expected to be passed. The design, configuration and funding model of the NHI requires further refinement and debate before being settled. Government must be open to engagement.

One of the goals that government set itself was to review SOEs with a view of not only rationalising them, but also minimising the risk of a State Capture repeat.  The review has not yet taken place and there seems to be no appetite to privatise any SOE. The only sale we have seen is that of South African Airways to the Takatso Consortium. The governing party appears to still be guided by its desire to run a developmental state and thus use critical SOEs to drive development. If government wants to ensure that SOEs deliver on their mandate effectively and efficiently, it will need to overhaul and strengthen their governance: from how boards and executives are appointed to cleaning up procurement processes and attracting the right skills at all levels in these organisations.

Last year’s Medium-Term Budget Policy Statement reflected an increase in spending on rail, road and water infrastructure, doubling over the medium term albeit from a low base. This is encouraging but will only yield desired results if spending plans are properly implemented. Infrastructure spending has not recovered from the peak years of spending on Eskom’s build programme. It is time to revive this important driver of growth.

The last, and perhaps most important fact to remember is that the ultimate aim of economic policy is to improve the standard and quality of life for all citizens; this by providing a social net for the young, old and vulnerable as well as employment and economic opportunity for the working age population. What South Africa’s unemployment crisis requires now is mass absorption of low to semi-skilled workers in the short term while fixing education and skillsdevelopment in the long term. This can be achieved through export led, private sector driven growth. Certain categories of manufacturing and agro processing can provide such absorption. Government must create conditions to attract investment into these sectors. The upcoming SONA and National Budget Speech provide an opportunity to present a blueprint of how this can be achieved.