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Gordhan outlines aggressive cost-cutting strategy

1st November 2013

By: Terence Creamer

Creamer Media Editor

  

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Finance Minister Pravin Gordhan announced plans to aggressively limit expenditure by government officials on a range of items from motor vehicles to alcohol, in a bid to contain costs in what he described as a “constrained fiscal environment”.

The cost-cutting initiatives, which were endorsed by Cabinet hours before Gordhan delivered his Medium-Term Budget Policy Statement (MTBPS) address in Cape Town, would be introduced from December 1, or earlier where feasible.

An instruction note outlining the restrictions would apply to all spheres of government, as well as to employees at State-owned companies and had been designed to “combat waste, inefficiency and corruption”.

The use of consultants would also come under scrutiny, with Cabinet demanding better contract management, stricter control of consultancy fees and that each government entity develops a consultancy-reduction plan over the course of this financial year.

The new restrictions related to issues such as air travel, car hire, accommodation, catering, entertainment and conference budgets. The issuance and use of government credit cards would also be eliminated.

Even the cost implications of the current sys- tem of having the executive in Pretoria and law- makers in Cape Town would be interrogated.

Gordhan dismissed suggestions that the ini- tiative was simply an election ploy, indicating that the cost-containment measures had been a work in progress for several months.

The measures were unveiled against the backdrop of a downward revision to government’s growth outlook for 2013 and for the three years to 2016, as well as lowered expectations for revenue collection.

They were also accompanied by a reinforcement of the expenditure ceiling set out in the 2013 Budget.

The 2013 growth outlook was lowered from 2.7% in February to 2.1% in the MTBPS, which also projected that the economy would expand by only 3% (3.5%) in 2014, 3.2% (3.8%) in 2015 and 3.5% in 2016.

Gordhan used his speech to reaffirm that government would meet its fiscal-deficit target for the year, which was revised lower to 4.2% of gross domestic product (GDP), from 4.6% in February – a revision aided by a technical adjustment to the reporting format, which boosted receipts and payments.

Tax revenue was revised down by R3-billion to R895-billion for 2013/14, while the total Budget revenue was revised up to R999-billion from R990-billion in February, partly as a result of the extraordinary receipts and payments.

Under the revised format, the deficit is projected to decline to 4.1% of GDP in 2014/15, with expenditure of R1.14-trillion expected during the period, before falling to 3.8% in 2015/16 and 3% in 2016/17.

Any slippage from the figures announced in February could have triggered credit downgrades, with the rating agencies having already warned that the risks were weighted to the downside, owing to a combination of deterio- rating fiscal balances and slowing growth, as well as social tensions and industrial unrest.

A spending limit had also been set for 2016/17, holding real noninterest expenditure growth to a yearly average of 2.2% over the three-year spending period. By contrast, noninterest spending grew at a yearly average of 8% in real terms over the period 2003/4 to 2011/12.

But Gordhan insisted that spending on key social and economic programmes would be maintained.

“This ceiling allows for sustained but mode- rate real growth in spending and a gradually declining deficit. Government will finance future priorities and respond to spending pressures by reprioritising existing allocations and eliminating wasteful expenditure,” the National Treasury added.

Wages and Debt
On the contentious issue of the public-sector wage bill, the National Treasury again acknowledged that growth had exceeded the rate of inflation over the last several years, but said action was being taken to enforce discipline in hiring of new personnel.

There were currently 1.25-million employed by national and provincial government, with 250 000 people having been added to the government payroll since 2005. Most of the new positions were created for teachers, nurses and police officers, but the National Treasury was concerned about the growth of administrative posts.

“Government aims to maintain staff numbers at a constant level over the next three years; exceptions will require a compelling explanation. Government is also committed to reaching a sustainable public-sector wage agreement.”

Attention was also turning increasingly to debt levels, with interest payments, represent- ing the fastest-growing expenditure item on the back of a substantial increase in government’s debt stock. By 2016/17, more than R140-billion would be required to service public liabilities, an amount that exceeds current spending on healthcare.

The main Budget net borrowing requirement is projected to increase from R168.5-billion in 2013/14 to R183.9-billion in 2014/15, before declining to R164.9-billion in 2016/17.

National government net debt is projected to reach 39.3% of GDP in 2013/14, 43.9% in 2016/17 and peak at 44% of GDP in 2017/18 – a peak that is both at a higher GDP percentage and later than initially expected.

The figure also excluded debt being taken on by State-owned companies, which were raising loans to partly fund large-scale investment programmes.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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