A BUSINESS PERSPECTIVE ON THE 2013/14 NATIONAL BUDGET Raymond Parsons Special Policy Adviser

1. A BUSINESS PERSPECTIVE ON THE 2013/14 NATIONAL BUDGET Raymond Parsons Special Policy Adviser BUSINESS UNITY SOUTH AFRICA PARLIAMENTARY COMMITTEE ON FINANCE Tuesday, 5th March 2013 Cape Town

2. A BIRD’S EYE VIEW • The year 2012 was disappointing for SA’s economic performance – for both external and internal reasons. • GDP growth: 2 ½ % last year. • A ‘tale of two deficits’ emerging • Fiscal • Trade • Relatively low levels of business and investor confidence • Generally agreed not good enough to successfully address the serious challenges of unemployment, poverty and inequality

3. EIGHT BUSINESS TESTS OF THE 2013 BUDGET STRATEGY • Economic trends • External • Internal • Predictability and stability in policy • Aligning economic strategy with the National Development Plan • Youth Unemployment • Role of the private sector / global competitiveness • Infrastructure rollout • State Capacity • Fiscal sustainability/discipline

4. 1. ECONOMIC TRENDS - EXTERNAL • Impact Of Global Developments • Negative impact of slowdown in Eurozone on SA exports. Uncertain outlook in key Eurozone area. Europe will not be a ‘locomotive’ for some years • Global economy as a whole may now be past its cyclical low point • US economy growing faster and China’s economic growth rate stable • Very modest global growth expectations all-round for 2013, except for a few EM high flyers still doing 7% • SA needs to diversify its markets to areas with better growth prospects

5. INTERNATIONAL BUSINESS MOOD – MARCH 2013 • Survey of 1500 executives undertaken for The Economist and Financial Times – 1stQ 2013 • Business barometer pushed into positive territory first time since quarterly survey began in 2011 • Executives in Middle East / Africa most positive • Overall four out of five executives think Euro crisis not yet over • Employment prospects best in Asia, Middle East, Africa = worst in Europe and North America

6. SA highly exposed to the weakest spot in the world economy – the Eurozone Agriculture: 37.3% Manufacturing: 28.2% Mining: 21%

7. Domestic Economic Trends • Over the years SA has remained within modest 3% - 3.5% growth – economy has grown at less than half the rate of its emerging market peers over past five years – SA must unlock its true potential • 2013 economic growth will remain positive but unbalanced. • Structural imbalances and lower productivity are increasing obstacles. • GDP growth in 2013 about 2.7%, but with downside risks • Inflation at upper end of target range due to cost-push factors and exchange rate • Continuing but so far manageable deficit on current account of balance of payments.

8. The mismatch between output & spending clear in a large current account deficit

9. Ratings downgrades are an issue – if inflows reverse circumstances could deteriorate dramatically • Investor sentiment • Volatility

10. Consequently, the rand is taking the bulk of the pain

11. THE RAND PERSPECTIVE • The rand is no longer a reliable gauge of global risk appetite • The rand is more relevant to perceptions of investment risk in SA • A weaker rand may be helpful to exporters but is not an economic panacea • SA needs about R200 billion in capital flows to finance its current account and supplement our limited domestic savings • Although overseas events have affected SA negatively, domestic policy is now under scrutiny

12. SELECTED ECONOMIC FORECASTS • GDP GROWTH BELOW EXISTING LONG TERM AVERAGE GROWTH POTENTIAL OF 3.5% • BELOW NDP GOAL OF 5.4% AVERAGE GDP GROWTH

13. 2. PREDICTABILITY AND CERTAINTY IN POLICY • Medium Term Budgetary Framework • Reinforcement of Commitment to fiscal discipline / ’value for money’ • Increasing Commitment to NDP • Effective Consultation • Authoritative investigation into the Tax System, instead of ad hoc decisions • Universalise use of Regulatory Impact Assessment (RIA) mechanism in public sector • Long term fiscal report by National Treasury

14. 3. ALIGNING ECONOMIC STRATEGY WITH THE NDP • We see the NDP as a roadmap for SA – an overriding, long term document that extends beyond the electoral and short term business cycle to form the framework of future policy creation. Provides a framework for predictability and certainty in policy to strengthen investor confidence. We hope the plan will come to underpin all future economic and social planning and regulations, providing the golden thread that underpins the battle to address the challenges of poverty, inequality and unemployment • We see the NDP as a national rallying call – that should unite the whole country behind it. Gaps and omissions can be addressed as implementation proceeds. It needs to build traction and show implementation. • Importance of monitoring implementation of NDP • As part of this process BUSA welcomes the call in the Budget Speech to develop a constructive partnership model with government

15. 4. YOUTH UNEMPLOYMENT • BUSA welcomes the focus that the Budget places on job creation and agrees with the Minister that, alongside education, the challenge of unemployment is key to addressing the future developmental goals and growth of SA • Agreed that the pressing challenge is expanding work opportunities for young people in various innovative ways • Youth Employment Accord to be signed shortly • Support need in addition for tax incentive to sharing costs of employing young work-seekers • Long-term SA wants to move from welfare to work

16. 5. ROLE OF PRIVATE SECTOR/ GLOBAL COMPETITIVENESS • Co-dependence between public and private sectors recognised • Encouragement of business to boost investment in economy and seize opportunities • Emphasis on key role of Small, Medium and Micro Enterprises and further assistance in Budget • Measures proposed to promote doing business in Africa • Need for SA economy to be globally competitive to carve out a larger share of world trade and investment

17. 6. INFRASTRUCTURE ROLLOUT • Importance of infrastructure spending to support growth and job creation • Welcome rollout of R827 billion Infrastructure Programme • Memorandum of Understanding on infrastructural development – cooperation with government • Role of private sector through expanded PPPs • Financing of Infrastructure in future • Role of administered prices – costs of doing business • Recent NERSA decision on Eskom tariff application – policy on ‘administered prices’

18. 7. STATE CAPACITY • Budget recognises SA inherited a severe unevenness in state capacity from the previous regime - with the result that those most in need of the state and its protection overwhelmingly live in areas where the capacity of the state to deliver is weak. BUSA agrees with the framers of the NDP who argue that a fundamental reimagining of the State is needed. Improving the capacity of the State is key. Without it delivery will simply not happen. We are pleased by the stress placed by the Budget Speech on this area and we think that plans to achieve these goals are possible and deserving of strong support. • Business is willing and able to join partnerships to address capacity shortfalls at all levels of government, but most especially at local govt level – In terms of human resource requirements, BUSA can join with government to help with the development of processes that will fill current vacancies, train incumbents and development best practice. In addition, business can help to explore models to directly partner with local government to fill the gaps that are created due to a lack of skilled engineers, managers and other key professionals. Over and above this, government can leverage the expertise and the strategic capabilities of the private sector to help translate policy intentions at national, provincial and local government level into practical and measurable plans with clear delivery outcomes and timelines. • Strongly support intensified steps to eliminate corruption

19. 8. FISCAL SUSTAINABILITY / DISCIPLINE • Fiscal discipline now will avoid fiscal austerity later • ‘Government will have to learn to do more with less’ • ‘Borrow-and-spend’ and ‘tax-and-spend’ both clearly have limits • Although headline debt ratios still appear manageable, they mask vulnerabilities • Building confidence in public debt management prospects • Factors outside National Treasury’s control

20. SUMMARY OF BUSINESS PERSPECTIVES ON 2013 BUDGET • Disappointing economic growth and increased external (rating agencies) and internal (constituency demands) factors make this year’s budget a very difficult balancing act – Encouragingly, the Minister was able to give more detail on the government’s assurances that the growth-friendly and generally better-accepted NDP is guiding both short- and medium-term strategy. This will help counter the perception that policy is confused and sometimes even inimical to growth and that fiscal sustainability will therefore always be in question. It was also helpful that there was no kneejerk hike in tax rates and that support to certain businesses will improve. • The difficulty is that the underlying figures remain concerning – While debt is well below the levels of many developed countries, comparisons with emerging market peers are becoming less favourable and the timing of the peak in debt is continually being postponed. The public sector wage bill also rises sharply in the year ahead, despite the multi-year wage agreement. Although it is then projected to grow more slowly over the next two years, there is a danger that the recently announced review of public sector wages could hurt these projections. • As always the effectiveness of government spending will be crucial to the success of government’s programmes and their effect on economic growth – In many areas business does not see the track record as encouraging, but there are proposals in the NDP and the Budget that could change this. The challenge will be to spread the message more forcibly to lower tiers of government

21. CONCLUSION • Business committed to helping to build an economy which is bigger, stronger, better and more competitive • SA needs a ‘virtuous circle’ of growth, investment and jobs • Budget and NDP are essential roadmaps to achieve SA’s socio-economic goals but ‘message’ needs to get more traction in public and private sectors • Parliamentary Committees need to use the NDP as their basic framework of reference in all relevant hearings • SA needs to largely write its own story in the years ahead