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Address by Deputy Minister of Finance hon Mondli Gungubele, debate on Adjustment Appropriation Bill in the National Assembly

28 November

The central challenges that South Africa face are to raise economic growth and reduce unemployment. The unemployment rate remains alarmingly high and many low- and middle-income households are contending with higher prices for water, electricity and transport. The quality of public expenditure is often poor and governance problems are severe, particularly at the provincial and local government levels, and in state-owned companies. Government is committed to tackling these problems.
The 2018 MTBPS highlights the difficult economic and fiscal choices confronting government over the medium term. It sets out an ambitious reform agenda to boost growth, reduce cost pressures (particularly from administered prices), and improve financial governance.

Relative to the Budget 2018, the MTBPS showed a significant widening of the deficit, largely driven by revenue shortfalls. The expenditure ceiling remains intact as a key anchor of fiscal policy, despite spending pressures. Gross debt is expected to stabilise at 59.6 per cent of GDP in 2023/24, reflecting higher borrowing, rising interest rates and rand depreciation. Government cannot continue to borrow at this rate. A path that stabilises and reduces the national debt must be chosen. Government needs to reduce the structural deficit, particularly by tackling the consistently high growth in the real public sector wage bill. In addition to the expenditure ceiling, new fiscal anchors may be required.

The candid nature of the messaging in the MTBPS 2018 has been applauded, but general feedback was that the fiscal slippage was larger than anticipated, and that the reform agenda had not gone far enough. Ratings agencies were concerned that the nature of the fiscal slippage (i.e. lower growth, revenue shortfalls) was too familiar, echoing many of the same issues outlined in the MTBPS 2017. Other respondents noted the limited details on state-owned company reform.
Looking ahead, government needs to take some difficult decisions to get the economy onto a higher growth path and encourage job creation. The President's plan to support economic recovery provides essential elements needed to bolster confidence. A crucial component of this package is the intention to partner with the private sector to increase investment in public infrastructure. In addition, government must make progress in strengthening governance, stamping out waste and corruption and turning around key state institutions.
Some progress has been made in implementing the President's recovery plan. In terms of removing blockages to growth:

* Draft policy direction for licensing high-demand spectrum has been issued.
* Work under way on restructuring options for electricity sector.
* Mining Charter has been approved by Cabinet.
* Visa regulations are being amended to boost tourism.

The second element of the plan relates to reprioritisation of public spending to support growth and job creation. The MTBPS includes reprioritisation of R32.4 billion over the next three years of which:
* R15.9 billion goes towards faster-spending infrastructure programmes, clothing and textile incentives, and the Expanded Public Works Programme.
* R16.5 billion allocated to various programmes and entities, including funding for the South African Revenue Service (SARS), a minimum wage for community health workers, critical posts in health, and management of the justice system.
* Changes to grant structures amounting to R14.7 billion will promote upgrading of informal settlements in partnership with communities. Housing subsidies amounting to R1 billion will be centralised to better support middle- and lower-income home buyers.
* In the current year: R1.7 billion added to infrastructure spending (including funding for school building programmes), and R3.4 billion allocated to drought relief, mostly for water infrastructure.

As for the third element of the plan, the introduction of the Infrastructure Fund:
* Government is working with development finance institutions (DFIs) and private-sector partners on an infrastructure project preparation facility
* To strengthen accountability and transparency, government will publish online expenditure reports of current infrastructure projects
* Government is negotiating access to funding from DFIs, multilateral development banks and private banks. These institutions have committed technical resources to help plan, approve, manage and implement projects
* Work is under way to design a fund that supports "blended" finance, combining capital from the public and private sectors, and DFIs.

In addition, consideration is being given to increased infrastructure financing from municipal borrowing and own-revenue, including development charges. Government aims to improve the use of existing municipal infrastructure grants, through incentives and stronger national support and oversight. In a period of low economic growth and rising administered prices, there is need to avoid putting additional downward pressure on the economy and household incomes. However, more fiscal measures may be required. Government would like to avoid major tax increases and expenditure cuts, but has begun to look at possible options. We must also find a way to sustainably manage government's wage bill, which consumes about 35 per cent of public resources. Between DPSA and Treasury, work has already begun in this area.

The current challenges with state-owned companies present an opportunity to demolish the walls that exist between the private and public sectors. Reforms to strengthen network industries, provide sustainable and affordable increases in water and electricity, and reduce the costs of doing business are likely to require major changes in the mandates and operations of state-owned companies. Without restructuring, there is a significant risk that the weak financial condition of state-owned companies will put major pressure on the public finances.

Hon members I thank you.

     
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