Economy

Budget 2020: The finance minister’s speech won’t please everyone

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Budget 2020: The finance minister’s speech won’t please everyone

  • FEB 28
  • Tags Budget Speech, Minister of Finance, South Africa, Economics

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When considering various stakeholder and community needs across the country, it is clear that this year’s annual Budget Speech will not satisfy everyone.

Question:         Budget 2020 – What should the Finance Minister say/ announce that will prompt you to express your approval of or satisfaction with the speech?

Answer (international investment community): Trimming the budget deficit; a decline in the government debt-to GDP ratio; guarantees that “the lights will stay on”, selling off/ rationalisation of state-owned enterprises (SOEs); policy consistency; restoration of institutional integrity and competence.

Answer (local “big business”): Fewer civil servants and/or wage freeze for civil servants; greater involvement of private sector; alleviation of corporate tax burden;

Answer (local “small business”): Slash red tape; tax breaks for small businesses; relax labour legislation.

Answer (organised labour): Job creation; no more retrenchments; higher minimum wages;

Answer (disadvantaged/ poor/ unemployed South Africans): Increased government spending on and expansion of social grant system; lowering of VAT rate; more spending on health care and education;

Answer (local middle-income consumers): Lower personal income tax rates; no more load-shedding; visible end of corruption; Rand exchange rate stops weakening

Each of the above responses is understandable from the isolated perspective of each individual stakeholder. But the responses are also, on the whole, diametrically opposed to each other and mutually exclusive.  At best, most of the hopes and expectations patently display a misunderstanding of the realities of either political expedience, or economic plausibility, or both. Moreover, the annual budget speech is primarily an estimate of government revenue and expenditure over the next financial year, which may provide an indication of strategic economic directions via the spending priorities identified by the minister.

But the responses are also, on the whole, diametrically opposed to each other and mutually exclusive.

The budget speech can and should not be seen as the panacea to all our economic woes and maladies. This statement holds true even in the best of times. In some ways the South African economy is currently experiencing the worst of times, partly as a result of external forces, but more importantly, as a result of domestic constraints.

In this highly interconnected and integrated world, no country is immune to the impact of global forces. Thus, leaving aside any internal constraints, South Africa’s economic performance echoes that being experienced in most parts of the world. Globally, especially in the USA and Western Europe, populist, nationalistic, protectionist, and anti-establishment sentiments will probably persist. While the long-awaited Brexit “divorce papers” have, at last, been signed, the terms of the divorce have yet to be finalised. The impact on the UK and European economies (our largest trade partner) remains uncertain, although a net positive outcome for economic growth in the UK seems unlikely. Despite some tentative signs of rapprochement, trade relations between the world’s two largest and most influential economies (China and the USA) remain troubled.

If we want a satisfying meal of positive progress… a starting point might therefore be to acknowledge where others are right.

“The current Constitution – never mind any amendments under consideration – promises restitution to people and communities dispossessed of property as a result of racially discriminatory laws or practices going back to 1913. It gives Government broad latitude to carry this out. Any other proposed solution can and should be measured against ‘giving back the land’ to those who have legitimate expectations that it be returned.”

Prof Ganson urged recognition that the mixing of questions on the principles of restitution of land with those of whether and how people to whom land is returned would put it to productive use, “must be hurtful and angering in the extreme” to former black landholders and their descendants.

It reeks of the argument in favour of the Natives Land Act of 1913 by the President of the Chamber of Mines, who opined that it would end ‘the surplus of young men … squatting on the land in idleness’ – but in fact provided low wage workers for the mines as it destroyed families and communities for generations to come.”

Prof Ganson suggests that, “In relation to those currently holding land that may be returned in the name of restitution under the provisions of the Constitution, we can concede that many of the issues they raise – even if immaterial to the fundamental right of dispossessed people and communities to land – are real.”

He suggests that it need not be in contention that it would indeed be better for all South Africans if land reform is managed in a way that confronts the realities of the substantial bonds on many properties, minimises corruption, maximises food security, and improves the possibilities for people either to make their livelihoods from the land or to make their transition to urban life, each according to his or her choice.

He believes that such perspective-taking might in the first instance invite parties to let go of one-sided arguments that serve to raise hackles rather than engender any real problem solving.

“Putting tongue in cheek for a moment, the current owners of large plots in Bishopscourt and Sandhurst, or Plettenberg Bay and Umhlanga, might agree that the person to whom land is returned is entitled to do anything with it, or nothing at all – lest universal application of standards of idleness or lack of productive use put their own tenure in question.”

“Others might begin to realise that ‘expropriation without compensation’ is a wonderful rallying cry in the international press but fairly empty here at home. Property returned to its rightful owner is hardly being expropriated; and thus, the fundamental question that cannot be bypassed is not one of compensation, but one of just and rightful ownership consistent with the mandates of the Constitution for restoration and transformation.”

Despite some tentative signs of rapprochement, trade relations between the world’s two largest and most influential economies (China and the USA) remain troubled.

All in all, world economic growth in 2020 will be uninspiring. Although the USA and Western Europe should manage to stave off a full-blown recession, the pace of economic activity in the more developed regions could be just as lacklustre as in 2019. China will also be hard put to record an economic growth rate in excess of 6%, as the trade tension exerts its negative influence. Moreover, the reach and severity of the coronavirus remains, at this early stage, unclear. This jaded global economic performance will be mirrored in low inflation rates, raising the possibility of a general further softening of interest rates from already unprecedented lows.

All in all, world economic growth in 2020 will be uninspiring.

We can also expect the implications of the Fourth Industrial Revolution to be at the forefront of numerous analyses of the future of work, while climate change, its effects, and mitigation strategies will be one of the most important geopolitical issues in 2020. Through a process of osmosis the South African economy is expected to be as listless as the global norm.

In addition to the external forces, over which we have no control or influence, the Finance Minister also has to contend with a number of self-imposed obstacles – often self-imposed – to growth and development.

Underpinning the current constraints in the domestic economy is the fact that South Africa has become a deficit nation. Government expenditure exceeds government revenue; imports of goods and services exceed exports of goods and services; household consumption expenditure exceeds household disposable income; and the demand for investment goods exceeds the availability of domestic savings. In short, gross domestic expenditure (GDE; aggregate demand) has been higher than gross domestic product (GDP; total output) for a number of years.

As a consequence,

  • the household debt-to-disposable income ratio has been between 75% and 80% since 2007, compared to a long-term average of between 50% and 60% in the previous few decades;
  • government debt is rushing towards 60% and beyond of GDP, compared to 28% in 2008;
  • the ratio of foreign debt to GDP is 47%, compared to 19% in 2005; and
  • fixed investment spending in 2018 exceeded gross domestic savings by almost 4.0% of GDP (in 2002, savings exceeded investment by a factor of 2% of GDP).

The overarching and cross-cutting implication of the growing indebtedness of ‘SA (Pty) Ltd’ is that the country lives in perpetual hope that its various deficits will be financed by non-residents, at an affordable cost. Until a decade ago this outcome was generally achieved, as foreign savers found the country to be sufficiently attractive to warrant a meaningful investment in shares, bonds, plant, equipment and other forms of direct investment. But this might have been not so much a vote of confidence in South Africa, but rather a motion of no confidence in the short-term economic outlook then prevailing in the USA, Western Europe, and Japan. Today, investors are probably finding it more difficult to formulate good reasons for financing South Africa’s fiscal, household, foreign and savings deficits. On reflection, therefore, South Africa’s relatively robust economic growth performance during the first few years of the 2000s was largely driven by consumer and investment spending, which, in turn, was accommodated by rapidly expanding debt. In fact, levels. The latter are not sustainable. In fact, the last few years have seen a modest decline in the share of household debt to disposable income as the households attempt to restore the integrity of their balance sheets. This has moderated the growth in consumer spending.

In fact, the last few years have seen a modest decline in the share of household debt to disposable income as the households attempt to restore the integrity of their balance sheets.

Government, however, has yet to follow suit. It is now in “injury time”; there are no more second chances. Although Moody’s has to date elected to retain South Africa’s sovereign debt investment status, the risks of a downgrade to junk bond status are real. There is particular concern among investors about the financial crisis being experienced by Eskom and other state-owned enterprises. As the government continues to bail them out, the mountain of debt continues to grow. Should Moody’s decide to relegate South Africa’s government debt instruments to junk bond status the consequences will, not surprisingly, be negative, as this would mean a “full house” – all three of the major credit rating agencies would have then given the government a stamp of disapproval. To start off with, it will become more difficult and more expensive to secure new loans. Rising borrowing costs will be borne ultimately by tax payers and consumers, thereby suppressing consumer spending and economic growth. At the same time, the cost of living will probably rise at a faster rate. The exchange rate of the rate will possibly weaken more severely than would otherwise have been the case. Foreign investment sentiment will be negatively influenced. Social spending by government will be constrained, unemployment could rise, and the overall socio-economic state of the country would be compromised.

Rising borrowing costs will be borne ultimately by tax payers and consumers, thereby suppressing consumer spending and economic growth.

In these circumstances this year’s budget must show a serious and plausible intent to, at the very minimum, curb the accumulation of debt. This requires a marked narrowing of the budget deficit by restraining the growth in government spending and/or raising tax revenue. The former will compromise the well-being of the poorer members of society. Given the very low economic growth expectations, the chances of organic growth in tax revenue are slim; this means that government will only be able to generate higher revenue through (upward) adjustments to existing tax rates. The usual increase in “sin tax” rates will not be sufficient. The most efficient mechanism would be another one percentage point increase in the VAT rate, which could yield an additional R20bn. This idea will be met with insurmountable political resistance, even though the burden on the poor could be relieved by, for instance, raising social grants and/or expanding the range of essential goods that are taxed at 0%. Failing this, the brunt of the higher tax burden is bound to fall on the private sector – specifically through a lifting of the maximum marginal rates of tax on personal income, and possibly the introduction of a “wealth tax”. Higher corporate tax rates might also be considered.

Normally, one would expect a government to adopt a stimulatory fiscal stance during times of economic stagnation. Now, however, if anything, an austerity approach is called for, with consumers, the business sector, workers, and the unemployed paying the price for past fiscal recklessness, foolishness, and indiscretions.

Meanwhile, for President Ramaphosa the honeymoon period has exceeded its sell-by date – 2020 is the year for him to show his mettle in dealing firmly and decisively with the legacy of the previous leadership. Included here are

  • The restoration of the autonomy and integrity of our democratic institutions (e.g., the Public Protector, the NPA, the criminal justice system).
  • Improving the country’s stock of social capital (trust, goodwill, shared values).
  • Not just paying lip service to the notion of stamping out endemic corruption.
  • The rebooting of state-owned enterprises (SOEs) – not least of which Eskom.

Tough decisions are called for, difficult trade-offs will have to be made (especially in trying to balance efficiency with equity), and immediate results are unlikely to materialise. And the challenges are exacerbated by the reality of factionalism within the ruling party. The cocktail of political turbulence is further fuelled by debates about land reform, the National Health Insurance programme, the chronically high unemployment rate, and pervasive inequality.

The cocktail of political turbulence is further fuelled by debates about land reform, the National Health Insurance programme, the chronically high unemployment rate, and pervasive inequality.

If Minister Tito Mboweni gets his way, we can expect him to table a necessarily restrictive – and therefore largely unpopular – budget speech in February. At the same time, it would be politically untenable to turn a blind eye to the very real predicament facing millions of South Africans – poverty, unemployment, and disillusionment. The notion of actually reducing government outlays on, for instance, education, social grants, and health care, is, in the circumstances, a ludicrous one.

When all is said and done, the minister’s budget speech will probably come in for a great deal of criticism from both friend and foe.

When all is said and done, the minister’s budget speech will probably come in for a great deal of criticism from both friend and foe. The simple budget arithmetic and the underlying conditions and unrealistic expectations are incompatible with one another. Things will first have to get worse for a while before they get better. But if the right strategic decisions are made with conviction and clarity of purpose and intent, 2020 might just be the year in which the seeds of a moderate recovery are planted. We should not allow our judgement of the country’s longer term future to be entirely clouded by day-to-day failures and indiscretions. In the words of Steven Pinker:  “To understand the world we should follow the trendlines, not the headlines.”

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Celebrating the empathy of a Grade 9 exit certificate

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Celebrating the empathy of a Grade 9 exit certificate

Empty Auditorium

  • Oct 01
  • Tags Education, Minister Angie Motshekga, Grade 9, Opinion, General Education Certificate

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By Dr Lize Barclay

On Thursday, 26 September, the Basic Education Minister Angie Motshekga opened a rather controversial can of worms by announcing that the South African Basic Education Department (DBE) would introduce a Grade 9 exit certificate. This will be called a General Education Certificate (GEC) and it will be managed similar to a Grade 12 examination. The minister noted that they took into account the disruption caused by the Fourth Industrial Revolution, entrepreneurship, and schools of specialisation. The Twittersphere was notably upset and various education specialists and politicians stated that it will only further disadvantage the poor, rural and Black students.

“South African education system from grades 10 to 12 is still very focused on preparing students for university and then getting a job.”

 

Using Grade 9 as a formal exit is nothing controversial or even novel. Most countries in Europe and some in Asia mainstreamed this options decades ago. Generally schooling in those countries take place in three different levels; it being primary (or elementary), lower secondary (middle school), and upper secondary (high school). Lower secondary are often exited at Grade 9 with the options to go to a gymnasium or lyceum from grades 10 to 12 to prepare for university entry; or to enter a vocational training college; or exiting the formal education system completely.

“The skills required for the entrepreneurs, innovators, and workforce of tomorrow are complex problem-solving, critical thinking, creativity, people management and coordinating with others.”

South African education system from grades 10 to 12 is still very focused on preparing students for university and then getting a job. The subject-based content is of little use in the very rapidly changing world of work where automation of routine jobs and the introduction of artificial intelligence require a fundamental shift in education. The skills required for the entrepreneurs, innovators, and workforce of tomorrow are complex problem-solving, critical thinking, creativity, people management and coordinating with others. These skills are not provided in schools, especially not from grades 10 to 12.

It should further be noted that many of the world’s largest companies, such as Google and Apple, do not require a degree qualification anymore, but a portfolio of skills. South African companies are lagging behind as they are still very qualification focused and are thus losing out on the creative and disruptive skills required for thriving in and surviving the ever-changing world of business.

“For the Grade 9 exit to be truly successful, some systemic changes are necessary to enable a flourishing climate for those electing this option.”

 

In South Africa, the dropout rate is extremely high, with almost 60% of first graders that will drop out before completing Grade 12. Many students have no choice but to drop out to support their families, enter informal entrepreneurship and the job market. An exit in Grade 9 will enable them to do so, not only with dignity but in line with global practices.

For the Grade 9 exit to be truly successful, some systemic changes are necessary to enable a flourishing climate for those electing this option. First, the FET college system should be strengthened as a formal and valued vocational alternative. Secondly, artisanal and vocational jobs should be seen as valued and align with the fact that it is globally sought-after. Thirdly, youth entrepreneurship programmes should receive more formalisation and funding as jobs will rapidly decline in favour of gigs and self-employment going forward.

Dr. Lize_BarclayDr Lize Barclay is a senior lecturer in Futures Studies and Systems Thinking at the University of Stellenbosch Business School (USB). Her current research explores policies and its future impact, gentrification, hipster culture, gaming, gender, the 4th Industrial Revolution and indigenous knowledge systems.

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USB’s Prof Daniel Malan to combat corruption on WEF council

USB’s Prof Daniel Malan to combat corruption on WEF council

USB News

USB’s Prof Daniel Malan to combat corruption on WEF council

USB’s Prof Daniel Malan to combat corruption on WEF council

  • Aug 13
  • Tags WEF council, Centre for Corporate Governance in Africa

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Prof Daniel Malan, director of the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School (USB), has been invited by Klaus Schwab, Founder and Executive Chairman of the World Economic Forum (WEF), to become a member of the WEF’s Global Future Council on Transparency and Anti-corruption for the 2019 – 2020 term.

As a council member, Prof Malan will work with other leading experts to develop new insights and innovative ideas to inform decision-makers around the world. He is also a member of the advisory committee of the Future of Trust and Integrity, a project of the Forum’s Partnership Against Corruption Initiative.

According to its website, the Network of Global Future Councils provides its members with a platform for multi-stakeholder collaboration that enables them to identify creative ways their council can contribute to solving shared challenges.

It is a well-known fact that corruption is stifling Africa’s growth. A recent article on corruption and how it is hindering the continent’s economy, states that one in four Africans had to pay a bribe to access public services last year.  Prof Malan says corruption is a global problem, but Africa faces specific challenges.

“Sub-Saharan Africa is the lowest-scoring region in the 2018 Transparency International Corruption Perceptions Index with an average score of 32 out of 100. In terms of the 2019 Global Corruption Barometer – Africa, also published by Transparency International, it is revealed that most people feel that corruption has increased in their country, but they also feel optimistic that they can make a difference in the fight against corruption,” he says.

“There will never be an easy solution, but more effective enforcement combined with innovative technology and efforts to encourage ethical behaviour can make a difference.”

“The fact that one in four respondents stated that they had to pay a bribe during the last year to access a public service is an indictment against African government officials, but corruption is also a huge problem in the private sector. There will never be an easy solution, but more effective enforcement combined with innovative technology and efforts to encourage ethical behaviour can make a difference.”

According to Prof Malan the Global Future Council on Transparency and Anti-Corruption will develop recommendations and integrate their findings into WEF activities such as the Annual Meeting in Davos-Klosters and regional and industry events, as well as global decision-making processes.

“Business schools have an important to role to play in the fight against corruption.”

He says business schools have an important role to play in the fight against corruption. “Schools must ensure that their own behaviour is always beyond reproach, and academic courses and executive development programmes should aim to build capacity amongst future and existing managers to lead by example,” he says.

USB is a participant in the anti-corruption working group of the United Nations Principles for Responsible Management Education. Prof Malan also played the role of lead consultant in the recent development of university ethics and integrity modules of Education for Justice, a project of the United Nations Office of Drugs and Crime.

*Reference: https://www.weforum.org/communities/global-future-councils

More about the Global Future Councils*
– The Network of Global Future Councils is the world’s foremost interdisciplinary knowledge network dedicated to promoting innovation thinking on the future.
– Two co-chairs lead each of the 41 councils comprised of 20 -25 leading experts from academia, government, international organisations, business and civil society.
– The network gives its members a platform to support the Forum’s vision to better understand and shape global systems in the face of rapid social and technological transformation.
– The council term will run from October 2019 – September 2020.
– The council meets at the Annual Meeting of the Global Future Councils in Dubai, United Emirates in November 2019 and delivers its outcomes as part of the Forum’s ongoing initiatives and meetings.

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Thinking on a future funding system: NHI

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Thinking on a future funding system: NHI

  • Aug 12
  • Tags National Health Insurance, South Africa, Opinion

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It’s important to note that the National Health Insurance (NHI) is a funding system.  Not a delivery system. The NHI is most probably one of the most misunderstood term in health care In South Africa. Its real meaning is sometimes augmented and most frequently diminished to represent something that it should not be or will not be.  The concept seems to be a good political tool and is sold to the voter as the solution to our health care problems.

It is not a strategy or a health structure. Far from that. The NHI is actually only a funding system where money for health care is centrally managed – not the process or quality of care.

Universal health care means that people have universal access to health care. Ideally, the quality of such health care should be good enough to improve the health status of the community and of the individual when needed. A good universal health care model will therefore define the areas of health concern for communities and individuals. It will plan for and service those needs through good planning of high quality services that include health system reviews, adequate staffing and leadership and effective management, understandable care processes, accessible efficient facilities, health data acquisition and proper budgeting and budget control.

But people, not governments, pay for healthcare. Present South African healthcare is funded by individuals (for themselves) and by the taxpayer (read: mainly the same individuals that fund their private health insurance) for the public sector.  The funding per individual in the two sectors (private and public) is therefore highly unequal, mainly due to the small taxpaying base that South Africa has.  If quantified, a private sector health care medical scheme member will pay for his/her and his/her family’s private health insurance according to what they can afford in benefits. These taxpayers will, collectively also pay about 60% of the care in the public sector through taxes.

The NHI is one way to fund universal health coverage.  It uses (mainly) tax money to fund health care for all and the taxpayer is therefore mainly responsible for footing the bill. It also, in the SA guise, may reduce the ability of the individual to continue to pay for e.g. no- NHI benefits in a medical scheme. This may be unappetizing for certain taxpayers and voters.

The quality of care in the two sectors (public and private) are also (with some very infrequent exceptions) very different. Where it costs more, the service is normally better but not yet optimal for the money spent.  Although more expensive than the private sector, the care in the private sector is mostly, but not always, comparable to services in some first world countries. In these countries the per capita expenditure in real money on health (not percentages of Gross Domestic Product as is frequently used) is 6 (UK) to 9 to 10 times (USA) what it is in the South Africa Private sector.

Market inefficiencies, market enquiries and other reports have shown this.  These cracks are not very large or unsurmountable to rectify, in the private sector.  Even if the fault-lines are fully fixed and amount to ZAR10 – 15Bn savings, this will not be enough, if efficiently funneled in some way or another to prop up a failing public sector. There is much less money per capita in the public sector. Management of money can improve patient benefit. Compared to the private sector, the quality of care in the public sector is frequently low and is fraught with solvable problems: bad access or when accessed, frequently suboptimal care, overcrowding and more than occasionally, a non-caring attitude from health professionals that are closest to the patient. There are reports of drug outages, non-availability of existing theatre and other treating facilities due to lack of qualified staff to man open workspaces and other problems that may elevate this to a potential perfect storm that will threaten health care on the ground.

When we fund, we must know what we are paying for and how much we need to deliver those services.

The NHI as funding system can only work if there are predefined health care benefits covered under this system. These must be carefully defined and quantified. This calls for gap analysis on facility and personnel needs and concerted efforts to improve these.  It calls for a list of carefully planned, NHI funded health care benefits that will be universally available.

This will lead to a clear idea of the quantum of funds needed and how funds will be spent if procured.  It will also afford South Africa well-grounded motivation to secure funds and to speed up funding for a good health system overseas.  Investors in countries’ well-being want to know what they are funding.

So where to with the possibilities of NHI? How can it work?

A pragmatic approach to implementation of a funding system such as NHI is needed. It is not adequate to say that it is a political decision and that if we implement it, we will start to plan the nuts and bolts of who and what will be funded.  The NHI will not solve the other problems that make health care in South Africa a very challenging space.  It will not solve for infrastructure, scarce leadership and management, the attitudes of health professionals, how it will service ill people and look after the health of those that are healthy.

Deeper, pragmatic modelling of care systems on the ground, concerted implementation of such good planning, infrastructure, care system logistics, supply of consumables to meet demand and prevent outages, staffing and good leadership and management skills (including financial planning and management skills) are needed. We need to use the time that we have available, very efficiently.

Can universal health coverage funded by and NII mechanism improve health for South Africans? Yes – if we do the right things right! If the above is quantified and properly implemented well-rounded planned universal health coverage, funded by adequate amounts of money with services delivered by good facilities with motivated staff, may be possible.

PROF MANIE DE KLERK IS THE HEAD OF THE UNIVERSITY OF STELLENBSOCH BUSINESS SCHOOL’S MBA IN HEALTHCARE LEADERSHIP.

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