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Cablegate: Perspectives On Minister Gordhan's Medium Term

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R 250835Z NOV 09



E.O. 12958: N/A


1. Summary: Representatives from business, labor and civil
society gave their views on Finance Minister Gordhan's Medium
Term Budget Policy Statement (MTBPS) to the Standing
Committee of Finance in Parliament on November 3-4. Most
speakers appeared to support the Minister's MTBPS and
indicated that he had managed to find the right balance at a
very difficult time for the country. Most of them also
called for prioritization and greater efficiency in
government spending. Sanlam Group Economist Jac Laubscher
asserted that the Minister had to manage "a fiscal calamity"
and emphasized that greater efficiency and effectiveness in
public expenditure was non-negotiable. Business Unity South
Africa (BUSA) General Manager Ray Parsons agreed that a
budget deficit in the current situation was appropriate, but
policy makers would have to make an effort over time to
balance it. Federation of South African Unions (FEDUSA)
Deputy General Secretary Gretchen Humphries emphasized
support for the Minister's focus on expanding employment and
strengthening education. The Congress of South African Trade
Unions (COSATU) speaker said that while COSATU generally
supported Minister Gordhan's budget priorities, it urged
government to go beyond job provision to the creation of
decent work. End Summary.

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2. Representatives from business, labor and civil society
gave their views on Minister Gordhan's MTBPS to the
Parliamentary Standing Committee on Finance during two days
of open hearings on November 3-4. Sanlam Group Economist Jac
Laubscher and the Institute for Democracy's (IDASA) Len
Verwey provided their views on day one. Representatives from
Business Unity South Africa (BUSA), the Federation of Unions
of South Africa (FEDUSA) and the Congress of South African
Trade Unions (COSATU) gave their feedback to the
parliamentary committee on day two of the public hearings.

3. Laubscher, in his presentation, noted that the public
finance situation had deteriorated sharply over the past year
with the country having lost fifteen years of progress and
having no fiscal space in which to maneuver. He likened
Gordhan's MTBPS to the management of a "fiscal calamity."
The main thrust of Laubscher's presentation was that the
government must prioritize and stream-line public expenditure
owing to lower tax revenues resulting from the recession and
a growing budget deficit. He pointed out that while tax
revenues had declined by 6.2 percent over the past year,
expenditure had increased by 17.6 percent during the same
time period. Government debt/GDP had also increased to 29.2
percent and would continue to rise over the term of the
MTBPS. The increase in debt together with high bond yields
would eat up any discretionary public funds in the
government's coffers. Laubscher further lamented the cost of
public sector salaries, which he indicated amount to
fifty-seven percent of public expenditure. He asserted that
this figure should really be less than fifty percent.

4. Despite the decline in revenues and the rise in
expenditure, Laubscher cautioned against raising taxes. He
indicated that South Africa's tax rate at thirty-two percent
is already too high for further increases. The average tax
rate for middle income countries is around 18.2 percent. If
South Africa further increases taxes, it could be a
disincentive for investment. Given this tight fiscal
position, Laubscher declared that greater efficiency and
effectiveness in public expenditure is now non-negotiable.

5. IDASA's Len Verwey echoed much of Laubscher's
presentation, but he also discussed the divergences occurring
between former Minister of Finance Manuel's budget speech in
February 2009 and the resulting outcomes later this year.
Verwey noted that Manuel had forecast positive economic
growth of 1.4 percent for 2009. In reality, there may be a
contraction of nearly two percent. Manuel had forecast a
budget deficit of 3.8 percent. The deficit is double that
figure at 7.6 percent. Moreover, given that economic growth
will only increase slowly over the medium term as will tax
revenues, the public deficit will remain large and government
debt will increase. In a similar manner to Laubscher, Verwey
recommended that government focus on eliminating waste and
inefficiency in government spending and emphasize job

6. BUSA's General Manager Ray Parsons said on day two of the
hearings that Minister Gordhan's economic growth forecast of
-1.9 percent for 2009 was realistic and in line with BUSA's
assessment. He emphasized that government must make a
greater effort to ensure that economic growth occurs and that
it increases in subsequent years. Parsons also shared BUSA's
support for the higher budget deficit of 7.6 percent and
indicated that it was appropriate for the country's
circumstances. He quickly added, however, that this position
must be supported by a "credible path" to a balanced budget.
Echoing the economists who went before him, Parson emphasized
the need to "drastically" improve the efficiency of
government spending and to "cut its coat according to its
cloth." He asserted that failure to do so would delay
economic recovery and prolong the government's need to
borrow. He also volunteered that the government must strike
a careful balance between social investment and investment
that will improve competitiveness and generate economic
growth. Parsons too warned against the imposition of further
taxes to pay for higher public spending. He noted that
existing taxes, together with rising input costs, and a
relatively small domestic market could discourage increased
investment in the country.

7. In the expenditure area, Parsons also maintained that
there needs to be more discussion on the financing of
state-owned enterprises (SOEs), including Eskom. He pointed
out that financing SOEs solely from government would
significantly increase the overall public sector borrowing
requirement which is projected to increase to R285 billion
(USD 38 billion). While Parsons supported government
investment in needed infrastructure through the SOEs, he
urged them to explore and take advantage of public-private
partnerships where they could access further funding for
expansion programs.

8. FEDUSA's Deputy General Secretary Gretchen Humphries
expressed support for Minister Gordhan's MTBPS, calling it a
well-balanced budget during a very difficult time. Humphries
commended the government for effectively using fiscal and
monetary policies to mitigate the worst effects of the
country's recession and cautioned against withdrawing these
policies too early. Humphries' main emphasis was on job
creation and skills development. She welcomed the different
programs outlined in the Minister's Statement, particularly
in regard to the training lay-off schemes and a new phase of
the expanded public works program. She also supported the
tax breaks and advisory services to the private sector to
further stimulate job creation. Humphries noted, however,
that the only solution to the country's unemployment woes and
low labor productivity is education and upgrading workers'
skills to make them more competitive. Accordingly, Humphries
shared that FEDUSA fully supported the Minister's
announcement of increased funding to improve the quality of
education, student performance and the strengthening of
education and training colleges.

9. Humphries too emphasized the need to curb government
expenditure, especially unnecessary spending on "extravagant
luxuries" such as expensive hotel rooms and upgraded airline
tickets while traveling on official business. Humphries
further pointed out that the R589 million (USD 78.5 million)
spent on enlarging the Zuma cabinet could have been used to
build more than 10,000 Reconstruction and Development Program
(RDP) houses, which would have improved the lives of ordinary
South Africans. She regretted that government extravagances
and corruption unnecessarily burden the country's tax payers.

10. Humphries, on the other hand, shared that her
organization was favorably impressed with the Minister's
determination to root out corruption in government. She
urged it to practice greater transparency and accountability
to ensure that the country's future remains secure and not
threatened by wasteful programs and expenditures.

11. The Congress of South African Trade Unions (COSATU) was
the last group to give their presentation to the Standing
Committee on Finance. COSATU's Parliamentary Office
Coordinator Prakashnee Govender indicated that her
organization broadly supports the five spending priorities
outlined in the Minister's Statement. She specifically
mentioned that COSATU fully supports the extension of the
child support grant to the age of eighteen but urged the
government to work towards free education. Govender further
maintained that the Minister's social security proposals were
inadequate and that the government should look at widening
the social security nets and incorporating basic income
grants. In line with this view, she expressed support for
the budget deficit but showed concern over its narrowing in
later years.

12. Govender further emphasized the overriding need, not
just for jobs, but for the creation of decent work with the
protection of income security as well as job security. She
indicated that the government should focus on procurement
from companies who provide decent work and promote local
procurement with local content, which would generate more
jobs in the country.

13. Comment: It is clear that Minister Gordhan has an
uphill job in effectively managing South Africa's tight
fiscal situation. With declining revenues, an already highly
taxed population and a fiscal deficit, his only option for
financing programs will be through continued borrowing.
Various economists have commented that South Africa could
take on additional debt, but they have also urged the Finance
Minister to curb government spending. It will have to be
tough love for his colleagues in government, who, thus far,
do not seem inclined to curb spending. Nevertheless,
Gordhan's track record as South African Revenue Service
(SARS) Commissioner in eliminating waste and corruption bodes
well for his performance as Minister of Finance and for the
South African economy. End Comment.


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