BUDGET IN PERSPECTIVE
SA creates and maintains its own obstacles to growth
Pragmatic industrial policies, based on specific domestic conditions, are required to improve the country’s economy, writes Ernie Lai King
Miracles are beyond the scope of Finance Minister Pravin Gordhan. He works within an environment fraught with undercurrents and factors beyond his control, several of which are pointed out in the 2016 medium-term budget statement review.
Impediments to sustained economic growth in SA include: policy statements that are unclear; commitments made without clear resource plans; implementation derailed by institutional instability, uncertainty and the erosion of trust; and vested interests and political contests that interfere with decision-making.
The main obstacles to economic growth are to be found in our backyard. Infrastructure bottlenecks, low levels of competition in certain markets, a volatile labour relations environment, regulatory constraints and red tape, inefficiencies in state-owned enterprises, uncertainties in the policy environment and the parlous finances of some state-owned companies and public entities.
Much of the increase in public debt stems from an unwillingness or inability by the government to control expenditure; hidden deficits and uncontrolled borrowing in the lower tiers of government; public agencies and state-owned companies that commit national budgets to implicit guarantees without following budget process; bail-outs of private sector financial institutions; and foreign-denominated debt, worsened by the rand’s depreciation.
The auditor-general’s 2016 report reveals that irregular expenditure increased 40% to R46bn. Just over 50% of the irregular expenditure was laid at the door of six offenders: the Passenger Rail Agency of SA; the KwaZulu-Natal and Mpumalanga departments of health; Gauteng’s roads and transport department and its human settlements department; and the Department of Water
The primary causes of the problem were the lack of competency and accountability. Reports to management of possible fraud or improper conduct for investigation were of little use.
A report on the development of Chinese enterprise in SA was released on December 8 by the SA-China Economy and Trade Association, providing insights from an influential foreign investor. It identifies these impediments to economic growth: public security, strained industrial relations, the shortage of technical professionals, a cumbersome visa system, insufficient energy supply, a continuously declining trend in the rand and infrastructure backlog.
SA has more than 30,000km of railway lines but approximately 50% of the lines are not operational. Insufficiency of operational capacity and poor operating efficiency have seriously harmed the competitiveness of exports such as iron ore.
The speed of passenger lines connecting metropolitan centres is unsatisfactory. The lack of financial investment and infrastructure and the significant funding gap is a great concern.
Pragmatic industrial policies, based on specific domestic conditions, are required to improve the country’s economy. We require unified and clear policies dedicated to
encouraging and protecting foreign investment.
Improving the efficiency of government departments, upgrading social security and reducing violent crime are a clear priority.
Economic globalisation and foreign direct investment into SA require high-quality management and technical personnel. Relaxing immigration and work-permit policies will help fill the gap of high-quality talent and assist in promoting local skills.
The Department of Labour’s statistics show that between 2008 and 2012, lost work days due to strikes were 440 days a year per 1,000 people in SA. Britain lost 24 days.
According to Adcorp, almost 830,000 highly skilled jobs are vacant. Highly qualified technical professionals are not available and foreigners struggle to obtain work permits timeously. Cumbersome immigration procedures and regulations cause lengthy delays. Critical technical and managerial personnel cannot enter the country.
So the government can fiddle around with fiscal drag, increase maximum marginal tax rates for "high-wealth" individuals, increase capital gains tax rates and estate duties, talk tough about anti-avoidance, increase the "invisible taxes" — but the core issue remains the economy and how to redress the blockages.
SA requires good government, good skills and good infrastructure as basic requirements. A good start would be the privatisation or semi-privatisation of nonperforming, loss-making state enterprises.
In 2015, foreign direct investment into SA dropped 69% to $1.8bn — the lowest in 10 years. SA still has a strong economic base but every year it erodes a bit more and investors move on. No one is waiting for SA’s "open for business" sign to go up. Is anyone listening?
• Lai King is Hogan Lovells head of tax for SA and Africa; Asia practice