National Assembly Debate on
The Fiscal Policy Framework

 

by Dr Mario GR Oriani-Ambrosini MP
 

National Assembly: 2 March 2010

 

Minister Pravin Gordhan is an extraordinary man. I came to know him during the negotiation process. He has a strong personality which would almost be intimidating and threatening, were it not for his intensely benign and reassuring attitude and the sense of confidence which emanates from his leadership. This may account for the fact that he has charmed so many into applauding his fiscal policy framework.

 

Minister Gordhan will borrow in the next three years not only as much debt as was accumulated during the last days of colonialism, the apartheid period and the new democratic South Africa - inclusive of money used for the greatly increased social spending of the past 16 years - but about one and a half times more than that. The present national debt of R513 billion will be raised to R1.3 trillion by 2013, and that is not the end of it.

 

According to his projections, the debt will only stabilize by 2015, by which time, if growing at the same rate, the debt will be R1.7 trillion. He clarified in committee that in 2015 we will have a stabilized budget, by which he means a budget with a deficit of only 4% of GDP which, by projecting the growth of the size of the budget and the GDP, means that after 2015 the deficit will grow by a few more hundred billion Rand per year. In this context, in 2015 every child will be born with a debt at birth of about R340 000 at present Rand value, steadily growing thereafter. The principle of no taxation without representation does not apply in respect of such newborns who will have to pay off money they had no part in borrowing.

 

With his charm, Minister Gordhan tells us not to worry because he has got it all figured out. He tells us that the economy will grow this year by 2.3%, next year by 3.2%, and the following one by 3.6%, and thereafter it will all be hunky dory. He is relying on the same advice of those who in the past 15 years have got growth projection wrong, starting from the 6% projected growth in GEAR, which turned out to be a mere 3%, to finish with the grand prediction that the recession would bypass South Africa.

 

The Reserve Bank appeared before our Standing Committee and frankly told us that the Minister's growth projections are inflated and they themselves work on something more realistic; around a flat 2% growth for the foreseeable future.

 

But this is not the end of it. After having decided to borrow us all into major problems on the basis of such optimistic outlook, Minister Gordhan candidly tells us that nobody knows whether the recession is really over and it may very well get much worse and longer before it gets better.

 

Therefore, we are borrowing against an untested best case scenario which the Minister himself warned us against giving too much credence to. To me this sounds like daredevil fiscal policy.

 

But it gets worse. In order to reduce the borrowing which would otherwise go to R3.6 trillion by 2015, Minister Gordhan takes out of the budget R846 billion worth of public expenditure for infrastructures and places this cost directly on the consumers' shoulders, at the time of their direst need and greatest indebtedness.  

 

Instead of doing what he should, which is financing Eskom's build program out of tax money so that the rich pays for it more than the poor, he let this and other infrastructure be financed through tariffs, so that the poor above the social safety net thresholds and the middle class will have to pay it off, while business can treat it as a pass-through cost, thereby again getting the consumer to pick up the bill.

 

But it gets even worse. Even taking Minister Gordhan at the value of his optimistic and charming face, he has no plan whatsoever on how to repay the R1.7 trillion of debt accumulated by 2015. His plan is to keep the debt there and service it at a cost to the budget likely to be one and a half times the entire budget of our education system.

 

Worse; his best scenario is predicated on certain assumptions on the revenue raising side. Yet the track-record of his Department also shows that they have got these projections wrong, as the Minister admitted to us in respect of this year. So we must compound the possibility of a lower growth rate with a lower revenue income in a scenario in which the only certainty is the minimum amount of money we are going to borrow, which will be at least about 50% of the GDP, but could be more.

 

Yet referring this debt to GDP is almost meaningless, as our families and industries alike are heavily indebted. A correct reference to the GDP should include not only the national debt but the entire debt of the nation, including that which each one of us carries.

 

Then there is the huge unspoken threat of municipal debt already skyrocketing out of control. In the final analysis this debt can only be paid by tax payers through rates or transfers from the national budget.

 

All this begs a question too scary for most to consider, and yet inescapable: How are we going to pay all this debt off? And if we don't pay it off, how do we cope with a situation in which we need to carry it on forever? Do we get out of it by means of hyper-inflation? Do we pursue a steady policy of tax increases so as to milk the middle class out of existence, especially the newly emerged one which has the lowest rate of accumulated savings? The Minister is already increasing indirect and regressive taxes this year, like fuel, alcohol and tobacco levies, and has made it clear that he gives no assurance that next year taxes will not increase dramatically.

 

There are no answers to these questions. Therefore, we have great difficulty in supporting a leap in the dark merely on account of how good, charming and self-confident a man our Minister is.

 

Contact:
Dr Mario Oriani-Ambrosini MP
82 556 0240

 

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