The Centre for Development and Enterprise (CDE) has urged the partners in the government of national unity (GNU) to map out a plausible growth strategy as a condition for passing the budget.

In a report released today titled Dealing with the Budget Crisis: CDE Recommendations, CDE argues for a series of urgent reforms. These include proposals on how to reduce spending in the short term, funding SARS to find more money from tax evaders, opening new revenue streams that focus on reducing existing tax breaks for the better off, and introducing a compact – signed by all GNU partners – to speed up fundamental reforms for growth.

Commenting on National Treasury’s proposed VAT increase that derailed last week’s budget speech, executive director of CDE Ann Bernstein said:

“This day was always bound to happen. For the last 15 years, government has spent significantly more than it has raised in tax revenues. In the process, it has driven debt levels from less than 25 per cent of GDP to more than 75 per cent.”

“Additional borrowing was used to finance higher salaries in the public service, introduce ‘free’ higher education, roll out the Social Relief of Distress grant, bail out state-owned companies (SOCs) and, increasingly, cover debt service costs – by far, the fastest growing spending item on the budget,” she said. “All of this at a time while economic growth was falling.”

“As a result of reckless economic policy, we sit today with a R190 billion hole in the three-year Medium Term Expenditure Framework (MTEF),” added Bernstein.

According to CDE, none of the options the GNU faces is painless: it can either raise taxes and other forms of revenue, reduce spending or go deeper into debt.

“Hope is not a strategy: A budget cannot be drafted on the basis that hoped for growth will materialise as actual growth. Nor can it be drafted on the basis that someone will cut spending at some point in the future to eliminate waste and inefficiency,” said Bernstein.

The March 2025 budget has to be based on real estimates of how much we will spend, how much we will raise in revenue, how much we will borrow and how much the economy will grow – this can’t be an exercise in ungrounded thinking about growth if we are to keep credibility in the markets.

Borrowing is not an option 

“The rapid increase in government borrowing over the last 15 years is a major reason why South Africa is stuck in its current low-growth permacrisis. We are deluded if we think we can borrow our way out of trouble,” said Bernstein

Raise revenue, but not taxes

Because SA is already highly taxed, and government’s credibility as a provider of basic services is catastrophically low, a substantial rise in taxes is undesirable. Tax hikes will lead to more tax avoidance and evasion, while the negative impact on growth will substantially reduce the revenue that government can generate through any tax increases.

“The best and least harmful way to raise more revenue is to improve the efficiency of revenue collection. In this regard, the GNU should immediately provide SARS with more resources so that it can pursue tax evaders and tax debtors,” said Bernstein.

“Another revenue-raising measure is to reduce targeted tax rebates, especially those whose benefits are highly concentrated among the better-off. This is much more reasonable than a 2 percentage point rise in VAT, which is highly regressive and bound to have destabilising political effects,” she added.

CDE calculates that halving the medical aid rebate, for example, would return about R50 billion to the budget over the MTEF, while halving rebates for the automotive industry for tariffs paid on wholly imported vehicles would also yield significant revenues.

Reduce spending

If government has to choose between more debt, more taxes or less spending to fix SA’s public finances, CDE has long advocated that the emphasis needs to be on reducing spending. This is partly because, government spending is grossly inefficient. There are:

• Too many low-impact programmes on the budget;
• Too many people in leadership positions who cannot do their jobs or spend public money efficiently;
• Too many public servants who do not (or cannot) do their jobs;
• Too many failing SOCs that are run inefficiently and continue to fail because they expect to be bailed out at some point; and
• Too much corruption and elite looting of the state.

CDE recommends the following cuts to expenditure:

1. Government should consider withdrawing from its recently agreed public sector wage agreement (5.5 percent) and implement a 3.5 percent wage increase, which would save R100 billion over the next three years. Even if an amount was allocated to accommodate the employment of much-needed additional doctors and teachers, savings of R60 billion over the three-year MTEF would be possible.
2. Government should change procurement policies that keep public sector purchasing costs higher than they should be. If government stipulated that goods and services budgets will rise by no more than 3.5 percent in each of the next three years, instead of the 5.4  percent pencilled in the rejected budget, it could realise savings of R50 billion. This would not affect service delivery if it were done in conjunction with a reconsideration of localisation policies that drive up costs. To get power plants working more effectively to reduce loadshedding, Eskom has been allowed to contract directly with equipment manufacturers, overriding localisation requirements. This experiment has worked and should now be applied to the rest of the state.
3. Government should immediately commit to an urgent review of payrolls to identify and eliminate ‘ghost workers’ drawing public sector salaries, with the results of the review tabled in Parliament.

There are other, more targeted, cuts that could be made, although not all of them could be effected immediately. These include shutting down SETAs and the National Skills Fund; and cutting state funding for small business in half (and closing that department). Other low-impact programmes need to be identified by a small multiparty Cabinet subcommittee which must motivate for these cuts and defend them publicly.

Growth strategy is essential

Ultimately, growth-promoting reforms (as long as they do not involve significant up-front spending) are urgently needed.

“The steps set out above are not enough. Cutting expenditure, on its own, will not resolve the polycrisis into which SA has fallen. At best it will only arrest the decline,” said Bernstein.

“What the GNU really has to do is get serious about growth. So far, the attitude of the GNU leadership seems to be that the mere existence of a coalition government amounts to a growth strategy. It doesn’t,” she added.

Since June 2024, CDE has been publishing reports on the actions that government needs to take to accelerate growth, which is the only way to deal with our catastrophic jobs crisis (see below).

“Starting the day after the finalisation of the 2025 Budget, the GNU needs to start designing and implementing a plausible growth strategy such as the one proposed by CDE. That should be a condition of passing the budget,” said Bernstein.

“The GNU has been very disappointing so far in delivering significant growth-promoting policies. This budget crisis presents an opportunity to change that, and to secure commitments for serious reform. Without reform, this will merely be the first in a series of budget crises which will become harder and harder to solve. The time for real change – and action – is now,” Bernstein concluded.

SHORT SUMMARY OF CDE’S RECOMMENDATIONS TO ACCELERATE GROWTH

The GNU should commit to implementing some big bold changes in the next six months. We cannot fix everything at once but the proposed priority actions, emerging out of CDE’s Agenda 2024 reports, would be an excellent start – sending important signals to investors and citizens that fundamental change is starting.

The list of actions CDE has recommended with respect to core reform goals include:

Action: Make government less costly, more efficient

• Publicly announce the end of cadre deployment
• Establish a smaller, less expensive cabinet so that it can act decisively and deliver required reforms
• Identify senior executive leadership positions (mission critical jobs) essential for implementing a vigorous reform agenda, and make sure they are occupied by the best available people.

Action: Deal with inefficient, debt ridden 

• Appoint a team, led by business leaders, to conduct a financial review of all major SOEs. The review must propose asset sales and generate a flow of income from privatisation.
• Amend the newly revised PPP regulations to ensure that private partners can be brought into SOE activities wherever desirable.
• Develop an overarching competition policy for public goods that identifies as many places as possible where competition can be intensified and therefore costs reduced.
• Establish a small, new, highly skilled department, led by the right people, committed to competition, to manage the SOEs and ensure there are effective boards and that policies ensuring competition and regulating SOEs effectively are implemented.

Action: Start to restore the rule of law

Focus on the NPA and strengthening its capacity to stop elite looting of state coffers

• The President should
  • Appoint a retired judge to assess the NPA’s leadership, performance, structure and independence. This review should make recommendations on the appointment process of the new head of the NPA
  • Respond to the National Director of Public Prosecutions’ request to suspend a Regional Director in August 2023
  • Instruct the Minister of Justice to immediately release the full archive of the Zondo Commission, including its witness statements and investigation materials, to the NPA
• The Minister of Justice should request the Chief Justice to discuss with the Judge Presidents of the High Courts to
  • Set up special corruption courts, drawing on retired and acting judges to obviate delays, without placing extra pressure on the ordinary work of the courts.

Action: Rethink growth, jobs and the DTIC

Create a much more competitive economy with more South African based firms enabled to produce for global markets, expand and create more jobs:

• Reform the tariff system and reduce protectionism. Immediately eliminate all tariffs on goods not made by any South African firm
• Establish an independent review of all support provided to the motor vehicle industry
• Get rid of masterplans which reduce competitive pressures on domestic firms and raise costs for consumers and downstream users of protected goods
• Work with business to establish productivity councils to help firms move into export markets
• Revoke the Minister of Trade and Industry’s powers to intervene on public interest grounds in mergers and acquisition hearings at the Competition Commission and keep market inquiries to an absolute minimum
• Abandon localisation policies – an approach that reduces the competitiveness of the SA economy and raises costs

Action: Let the private sector lead on small business development

• Close the Department of Small Business Development and massively reduce government activities in this area (it is estimated that R6 billion is spent on this each year)
• Provide – through transparent competition – R9 billion over the next three years to strengthen private sector small-business funders
• Subject all regulations to an ‘SME test’ to determine the extent of their impact on small businesses. Establish a unit in the Presidency (combining existing units/task forces) to implement the test and push through meaningful regulatory amendments
• Eliminate the power of the Minister of Labour and Employment to extend collective bargaining deals to non-parties. This harms small and non-metropolitan firms as well as new firms
• Make small business funding and deregulation transparent.  Annual event in Parliament where public and private agencies account for expenditure and report on results, including impact of regulatory change

These five areas of action do not constitute a comprehensive reform programme or growth strategy. However, set in motion with vigour and speed and implemented effectively, they would provide strong signals that real change is taking root in South Africa, leading to the required accelerations in growth, investment and jobs.

For media enquiries and interview requests, please contact Refiloe Benjamin: media@cde.org.za | 011 482 5140

ABOUT AGENDA 2024: PRIORITIES FOR A NEW GOVERNMENT

AGENDA 2024, based on CDE’s extensive policy work and recent consultations with experts, business leaders, former public servants and academics, sets out to answer what is by far the most important question facing South Africa: what can a new government do to get the country back on track after 15 years of stagnation and decline?

CDE’S AGENDA 2024 identifies five urgent priority areas that the new government needs to focus on: fixing the state; driving growth and development by freeing up markets and competition; building a new approach to mass inclusion; tackling the fiscal crisis; and strengthening the rule of law. Previous reports in the series can be accessed here.