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GRM's thoughts on the Treasury's discussion paper on the SA Economy

By Rob Green

Published Date: 2019/09

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Commentary on the “Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa” report, Prepared by Economic Policy, National Treasury.

By: Rayne Handley & Rob Green
 
GRM Intelligence agrees that the purported unsustainability of South Africa’s current economic trajectory and that there is a profound need for reform. In terms of the proposed strategy outlined by the National Treasury report however GRMI supports certain aspects and rejects others and have a few suggestions of our own. 
 
1) How does a government really invest in its people?
 
Investing in education is undoubtedly important. The 2019 budget proposed R5.87trn to be spend on education and culture of the next three years. This being the largest allocation of spending. So, the funds have been made available. 
 
The problem is not investing in education. The problem is a lack of service delivery, inappropriate spending of allocated funds, and potentially corrupt and ineffective tender process.  Teachers and schools need books and learning materials on time, they need support in creating healthy learning environments, schools need to be regulated and need to have the ability to monitor the quality of teachers and teaching. 
 
South Africa doesn’t need a bigger education budget – we need the highest quality/lowest price suppliers to be selected, for all spending to be accounted for, for all spending to be directed to improving learning. For those who exploit the budget to be taken to task and be held accountable.
 
By increasing the level of education at a basic and tertiary level and offering skilled apprenticeships and alternative educations based on practical skills, we would enable our citizens to secure better work which offers better salaries and better career growth possibilities. 
 
By increasing the level of education at a basic and tertiary level, we are preparing South Africa for the 4th Industrial Revolution. The jobs of the future will require very different skills and will almost definitely necessitate a higher level of education and potentially qualification.
 
2) Investing in labour-intensive as opposed to upskilling is going to harm the economy.
 
A negative effect of the 4th industrial revolution on unskilled labour is only avoidable by making them skilled or we risk compromising our global and local competitiveness.
 
GRMI advises that South Africa automate as much as possible. Automation means you can produce more goods, faster and cheaper. This increase in productivity and output improves profit margins. This leaves more profit to hire, more profit to tax, more money entering the economy, cheaper goods on the market. Tech, AI and capital-intensive advancements will create more skilled jobs than the unskilled jobs it will inevitably replace. 
 
If we do not progress and advance with the rest of the world, South Africa will remain behind. Our goods will be too expensive, we won’t be generating enough, our trade and prices will be affected. Labour-intensive may help a few people today, but capital-intensive will save our nation tomorrow. Automation will change the labour landscape, and that’s a good thing. 
 
Replacing unskilled jobs with skilled jobs will have a positive impact on the economy and households alike. We need people to design, engineer, transport, build, repair, programme, sell, market etc. 
 
We need to educate and train our people to be ready to fill these jobs. These new jobs will necessitate new skills and qualifications. 
 
Hence the pertinence of spending our countries education budget better than we currently are. There needs to be much more focus on retraining our existing workforce. You do that by investing in facilities, tools and programmes that are brought to their homes and communities, to cut travel and other expenses. You focus on post-training work placements and continued education thereafter.
 
3) What do SME’s really need?
 
Whilst a great deal of this discussion paper produced by the Treasury revolved around SMME’s (SME’s), we believe none of the points raised really get to the heart of the matter. Most economists and analysts will agree that to fuel an economy, and to do it quickly – you need to encourage small businesses to grow and to spend.
 
It is not big businesses or SOE’s that fuel and economy, it is the millions of small businesses, that hire 1, 2, 10, 20 people. If you look after them, if you encourage them to continue to grow and to add new services and revenue streams – then you have a healthy economy.
 
So how can SA really boost this sector and ad millions of jobs? Very, very easily in our view.
 
Tax breaks: Tax is crippling SME’s and has a major impact on profitability and cash flow management. SME’s need tax breaks, tax education and guidance. Whilst some talk about it, it is our view that currently, entrepreneurship is not encouraged by the Treasury, unless you really encourage someone to start a business, by giving them an incentive – you will not start the next generation of entrepreneurs. 
 
VAT: SME’s have the same rules for VAT as big business, which, in our view, is ludicrous. VAT is owed to SARS on the raising of an invoice, not when it is paid by clients. Whilst you may have strict payment terms in place, your client may be late in paying for your services, as anyone that runs an SME knows, happens regularly. This means that the SME has to pay SARS and has no idea when the client is going to pay them. This puts incredible pressure on the SME’s cash flow and means they are less likely to spend, hire and expand.
 
Incentivise hiring: Working within the human capital space, GRMI has spoken to countless SME’s that would love to hire more people but feel that in order to do so labour needs to be more affordable and less risky. The government needs to create labour policies that encourage and not deter hiring. 
 
Currently, it is too expensive to hire staff and it is difficult, time-consuming and expensive to let go of staff if your SME runs into cash flow issues or because of poor performance. Minimum wages for large corporates and SME’s ought to be different. 
 
Tax incentives should also be offered (particularly so with youth employment) to SMEs based on their employment levels, making it increasingly feasible to invest in talent. SA has an employment environment whose power base is heavily weighted towards the employee and it is possible that a switch to the employer would encourage business to hire more. 
 
Competition is good, regulation only when needed: We agree that competition is good and barriers to entry need to be addressed. SMEs are a major contributor to the South African economy. South Africa has a strict regulatory environment and a complex legislative and compliance environment. SME’s need guidance, information, and training before they can be expected to comply. Many of the governmental regulatory and compliance institutions and bodies are run ineffectively, they are under-funded, they are strangled by red tape themselves, they have adopted legacy systems, processes and policies that are unneeded.  Proposed trade policies appear to be sound, but how do we implement these policies? The Rand had a real beating in August which has had countless knock-on effects, including rising fuel prices. This coupled with a sad fiscal outlook is deterring investment and diminishing growth.  
 
4) Our government needs to be run like a profit-seeking company
 
Firstly, this is not to say that our public servants are profit-seeking! To the contrary, it means that the country must put a stop to individuals within public positions of power to stop gaining financially to the detriment of departments, ministries, and other institutions, and worst of all to the detriment of industry and individuals. We need to run our government bodies and institutions like profit-seeking private organisations. Aiming always to increase efficiency and effectiveness, improve productivity, streamline costs, and ramp up internal controls, checks, and balances. 
 
The public sector alone cannot dent unemployment or youth unemployment. The private sector (formal and informal sectors) need to be encouraged to hire. The South African government cannot overburden itself with a larger wage bill. The wage bill is arguably already too high given current resources. The government needs to save SEOs without further negatively impacting upon the budget deficit and South Africa’s debt to GDP ratios.
Consumer spending is down, inflation is up, suppliers and retailers are forced to push up their prices to stay in business, fuel prices go up, the purchasing power of firms and consumers is being eaten away and soon a vicious cycle of suppressed spending, and struggling to get by begins. Pushing up wages won’t help, pushing up taxes so that the public sector can try fill in the gaps won’t help. 
 
Focus on creating an environment where business thrives. An environment where setting up and running a business is affordable and easy. 
 
GRMI agrees with the National Treasury report that it is pertinent to drastically reduce policy uncertainty in order to improve local and foreign direct investment. In addition, GRMI believes South Africa should review Visa regulations, to increase tourism and increase skilled migrants.
 
Electricity: If the government wants to save Eskom, they need to proceed carefully. Eskom needs cash, urgently. Potentially a debt to equity swap in order to prevent any further indebtedness is needed. The monopoly of South Africa’s energy sector needs to be put to an end. The sector must be opened to competition and the private sector. The least-cost option would be to halt the high-cost energy generation plant building and as mentioned in the report, purchase electricity from independent producers. Further to this GRMI suggests that policy needs to allow for more diverse energy to enter the grid, including individuals feeding excess energy into the grid generated by generators, solar panels etc.
 
Telecommunications: GRMI does not believe there is enough of a commitment to building, expanding, and reducing the cost of telecommunications. Data is no longer a commodity, it is a necessity. The cost of data in this country is a major setback to individuals and businesses. A major issue being faced by telecoms companies is theft and vandalization, there are major costs involved in telecommunications infrastructure and the ability to grow telecommunications and improve reach is being affected by having to allocate money to rebuilding what crime has taken. The continued increase in competition is a fantastic proposal, as is the reports urge for Telkom to leverage the private sector.  
 
Transport: Many of the report’s suggestions for the transport sector are important. But is it enough? Transport is a key sector that impacts so many other sectors and consequently has a pertinent role to play in the South African economy. Transport and transport infrastructure, play an essential role in encouraging greater trade, commerce, and movement of people. Once again theft and vandalism have plagued the optimal advancement of state-provided transport infrastructure. Fraud and mismanagement have nearly crippled it. With transport playing such a key tole there is arguably insufficient funding for it. Nevertheless, the government must address the ineffective Metrorail. Transport safety is also a major concern that needs addressing. Better policy around transport is mandatory, the e-toll saga stands in testament to this. We must invest in better rail; we must expand our ports.
 
Water: Forget about backlog and infrastructure for a second. South Africa is a water-scarce country. There have recently been concentrated water crises, but the reality is that the entire country is going to face water issues in the next couple of years. There needs to be better communication, nationwide education and planning for this inevitable water scarcity. South Africa’s water policies are very sound. The problem comes in with poor implementation and a lack of financial backing. South Africa needs to prioritise the preservation of water sources, address the major infrastructure issues, and improve wastewater management (both to prevent inadequately treated sewage and polluted water from ruining our water sources and to ensure water can be reused where possible). Wastewater treatment is cheaper than proposed desalination plants, although in the long-term desalination maybe South Africa’s only option.   
 
Conclusion
 
Until South Africa can get inflation under control, so goods are more affordable, and salaries are not being eroded. Until South Africa reduces the burden on small business and focuses on using tax resources more effectively, real GDP growth improvements will not be seen. Jobs cannot be created without an environment that encourages business growth and entrepreneurship. South Africa must learn to balance short-term and long-term economic growth and vitality. Reducing red tape needs to be accompanied by greater oversight to reduce crime and improve compliance. Increasing the budget deficit or taking out loans need to be thought through carefully as South Africa’s debt to equity ratio is already placing the country in a compromised position. South Africa is barely hanging onto Moody’s rating. Teetering on the edge of “junk” status. The government must halt the apparently never-ending bailouts and redirect funds to economy-boosting investments. South African’s don’t need their own airline, they need jobs, they need clean water, they need safe transport, they need food on the table.