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R 250835Z NOV 09
FM AMCONSUL CAPE TOWN
TO SECSTATE WASHDC 3230
INFO AMEMBASSY PRETORIA 
AMCONSUL DURBAN 
AMCONSUL JOHANNESBURG

UNCLAS CAPE TOWN 000249 
 
 
PLEASE PASS TO AF/S, SUSAN WALKE 
 
E.O. 12958: N/A 
TAGS: EFIN SA
SUBJECT: PERSPECTIVES ON MINISTER GORDHAN'S MEDIUM TERM 
BUDGET POLICY STATEMENT: ECONOMISTS, BUSINESS, LABOR  AND 
CIVIL SOCIETY GIVE THEIR VIEWS 
 
REF: PRETORIA 02236 
 
¶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. 
 
¶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 
creation. 
 
¶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. 
 
 
HOLT