Pointers for Pravin

By Ebrahim-Khalil Hassen · 10 Feb 2010

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Picture credit: www.sars.go.za
Picture credit: www.sars.go.za

The previous Minister of Finance, Trevor Manuel, always peppered his budget speech with humorous advice received as part of his “Tips for Trevor” campaign. As Minister Pravin Gordhan unveils his inaugural budget speech what would a set of “Pointers for Pravin” be?

Judging by his Medium-Term Budget Policy Statement speech in 2009, the South African public should also remember that Minister Gordhan is likely to make a point or two of his own.

In many ways Minister Gordhan’s speech occurs in a rather changed set of circumstances. Importantly, the advice of citizens will now have more weight as parliament has a set of amendment powers with respect to the budget, meaning that the process of decision making is much more democratic and will need to pass a much stricter and transparent test. The amendment powers for parliament gives expression to a long held civil society demand to make the budget more transparent and democratic.

The opening of democratic space in relation to the budget coincides with an ambitious programme for government, as outlined in the Medium-Term Strategic Framework. Whilst there is still space for an even more deliberate programme to tackle poverty and inequality, the framework does provide the space for imagining and implementing a significantly enhanced redistributive budget. However, the global economic crisis has had a major impact on South Africa’s revenue collection and Minister Gordhan will face a significant challenge in meeting legitimate expectations within the constraints of limited resources.

The challenge is a significant one, as we have amongst, if not, the highest rates of unemployment and inequality internationally. The central question then becomes: Are we laying solid foundations to support structural change in our society? The very idea of structural change leaves many in a state of panic, as it is based on a caricature of left developmental strategy. In some renderings, the caricature sees a once-off transfer to the poor that ultimately leaves the country poorer and the recipients of the transfer even poorer. However, this caricature dismally fails in its understanding of why a developmental perspective (and associated policies) needs to be carefully understood and implemented in relation to the budget.

First, the global economic crisis marks the failure of neoliberal policy reforms enthusiastically advocated by the very bankers that plunged the world into crisis. The central lesson for the bankers is that just like a country cannot perpetually print money, so too, can bankers not perpetually sell “paper” (i.e. debt not backed by assets) without a massive crisis arising. The global economic crisis has shown us that without building sustainable opportunities as well as assets and incomes for the poor, the vagaries of the market will have the most devastating impact on the most vulnerable. It is thus commonplace, even for economists located in conservative institutions like the World Bank and International Monetary Fund, to speak about the global economic crisis as being followed by a global humanitarian crisis. The early signs in South Africa are extremely worrying.

Stats SA’s most recent fourth quarter labour force survey showing an increase in employment is insignificant because on the one hand it is miniscule and on the other, structural unemployment remains unaffected. Most of the 61,000 jobs created are in the informal sector, are of poor quality and do not afford people the opportunity to participate effectively in the real economy. This arguably will not address a burgeoning poverty rate. The crisis, however, might just be what is needed to tackle the underlying features of structural poverty in our country, as it forces us to confront our development challenges.

Second, despite the praise of our macroeconomic performance since 1994, the budget still largely reflects a focus on dominant interests. This is aptly demonstrated in the small business sector receiving little support from government in comparison to larger businesses. Research shows that only around 5,5% of national expenditure that is focussed on the economy is spent on the small business sector. In addition, tax incentives for smaller businesses are small, providing little support to “start-ups” in the crucial first two years of business. This is important because without such support, the small business sector cannot live up to its potential for job creation, nor can it provide the springboard for a democratisation of the economy.

Importantly, this means that labour absorbing firms that are not BEE compliant receive little legal and regulatory support. At the same time, small start-ups run by blacks and females are not given support in a business environment that sees larger firms collude on prices and effectively stitch up entire value chains.

In the Medium-Term Budget Policy Statement, the National Treasury indicated that this is an area they are working on. Potentially, this area would represent one of the early interventions by government to support economic democracy and inclusion. There is, thus, a strong possibility that a much-needed tax incentive for small businesses will be announced during the budget or that good progress has been made in this regard.

Third, for all the criticism of Trevor Manuel’s tenure as finance minister, it coincided with a significant expansion of social grants, but with a rise in youth unemployment. The former Minister of Social Development, Zola Skweyiya, proved an exemplary advocate for the expansion of social grants, in particular the Child Support Grant. For civil society groupings advocating for a universal Basic Income Grant, the extension of grant support has been widely welcomed. The developmental outcomes have buttressed arguments for the expansion of grants; with research showing that children receiving grants are more likely to have better nutrition, stay in school and for unemployed adults in recipient households, support job search. Moreover, by accessing the social grant system, other government supported programmes like free health care and “no fee” schools become more effective. These arguments are well known.

A less focussed upon feature is why the criticism of the expansion of social grants has been so muted. Granted, there have been wild and unfounded claims of a rise in teenage pregnancies attributed to the child support grant as well as arguments that the grant raises the cost of employment. In both of these instances the claims have been proven false. Government commissioned research, for instance, shows that take up amongst teenage mothers is low. Furthermore, unemployed working-age adults cannot access the grant, meaning that links to prices in the labour market are at best tenuous. Ironically, across studies, recipient households have a higher job search activity.

Grants, however, play a bigger role, as they in effect provide the function of a social safety net as government undertakes reforms of the economy. Private sector commentators are attuned to this reality and have thus offered only muted criticisms. But, the social safety net has huge gaps. Unemployed (young) adults are not covered from the age of 18 onwards until they reach retirement.

Thus, the broader issue of tackling youth unemployment remains the most serious gap in Government’s policy interventions aimed at poverty and unemployment. Several proposals including those for a wage subsidy for young employees and a significant expansion of apprenticeship type jobs in the public service have been circulating for at least half a decade. Government needs to bring this discussion to a head and lead on a range of measures to intervene in youth unemployment. Minister Gordhan, could, for instance, direct the savings from his cost cutting exercise to fund pilot programmes almost immediately.

Fourth, innovative programmes on job creation need to move to scale. There are government run programmes that show significant potential to create jobs, but will need significant technical, operational and financial support to be sustainable. For too long the excuse of limited capacity has stopped the expansion of promising programmes. In truth, this is a challenge for all government departments for how to scale up promising pilots, but it requires political decision making as a precursor to operational plans. Programmes that could fall into this category include the community works programme run by the Department of Public Enterprises and several smaller projects in arts and culture, agriculture and the communications departments. Equally important is the amplification of voices calling for ‘green economy jobs’.

The easy route would be to ‘make tough choices’ and select only a small range of projects. The more difficult route would be to see each of these proposals as a pilot programme. This would require government supporting all projects with well-constructed operational plans that demonstrate strong evidence for success. This route is harder because it requires significantly more resources as well as a recognition that the answers to addressing structural unemployment are found in practice and experimentation.

Importantly, the argument is for a strategic shift in government policy focussed on building an economic democracy. The usual criticism is that such a shift would be too costly and would place an excessive burden on future generations as debt increases. However, Minister Gordhan and the team of Ministers focussing on the longer-term expenditure review may provide the answer. By cutting back in every area, funds can be redirected towards high potential programmes.

In other words, there need not necessarily be a simple trade-off between fiscal responsibility and the adoption of sustainable programmes aimed at redistributing opportunities (and eventually outcomes) through the budget. At the same time, there needs to be a strong focus on improving performance in the public service especially in the health, education and policing sectors.

As Minister Gordhan delivers his inaugural budget speech, he is more than likely to pass the technocratic test. The much-needed review of expenditure is on track and through this we potentially add value to every rand spent by our government.

However, the broader test is important. Those within civil society will be looking not so much at this or that macroeconomic variable, but rather at whether or not the budget begins to shift public resources more deliberately to ensure that every South African has the opportunity to participate within the economy. Hopefully, Budget 2010 signals a “Pointer from Pravin” that the budget will, over the next few years, be more strongly focussed on supporting structural change.

Hassen is the founder of Zapreneur and Proposal Desk, both websites aimed at answering the question, "Can the Internet help South African small business?"

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