Sona and budget 2023: what government can do for SA

The SA Reserve Bank’s decision to raise interest rates for the eighth consecutive time 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 SA may be over the worst of the crisis.

However, this does not change SA’s poor growth outlook, which the 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 the government will outline its plans through the state of the nation address (Sona) and the national budget speech, which will need to respond to several challenges. Key among these is the improvement of efficiencies to boost economic function and contain price increases.

SA 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.

Contain price increases

The best thing government could do for households and businesses in the year ahead is help contain price increases and lower the cost of doing business 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.

The government needs to ensure reliable and affordable energy supply and to lower the cost of logistics, which means addressing the problems at the affected state-owned enterprises (SOEs), Eskom and Transnet. Beyond this, it has 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, for example private courier services stepping in where postal services have collapsed and mobile network operators delivering affordable data services.

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

Revenue collection

Revenue collection has been one of the key pillars of success in SA’s democracy. The reform and repositioning of the SA 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 and compliance, as well as tax morality. 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 SA 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.

The 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 consumers' disposable 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 to load-shedding.

VAT cut

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

This year marks seven years left for the country to realise the National Development Plan goals. Among these were the creation of a capable state and 11-million jobs. The former goal is now mired in a debate about the size and configuration of the public service and the public sector 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 such as floods and wildfires to protect public infrastructure. The debate around the public service wage bill is essentially one about value for money. A digitised government can deliver this value.

It has been two-and-a-half years since the July 2020 emergency budget that had to be adopted to reprioritise spending in the wake of the Covid-19 pandemic. Health care received additional resources for obvious reasons. The coming budget must demonstrate how far the government has gone to recalibrate health-care spending to prioritise other public health emergencies, including tuberculosis and HIV/Aids, teenage pregnancies and SA’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. The government must be open to engagement.

One of the goals the government set itself was to review the SOEs with a view to not only rationalise them but also minimise 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 SAA 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.

Infrastructure spending

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 yield desired results only 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 by providing a social net for the young, old and vulnerable, as well as employment and economic opportunity for the working-age population.

What SA’s unemployment crisis requires now is mass absorption of low- to semi-skilled workers in the short term while fixing education and skills development 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. The government must create conditions to attract investment into these sectors.

The Sona and national budget speech provide an opportunity to present a blueprint of how this can be achieved.

• Kubeka is MD for Africa tax & legal, Tshesane government & public service, life science & healthcare leader, Lane energy, resources & industrials leader, and Marais associate director: insights leader & acting chief economist, at Deloitte Africa.