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Introduction

After the disappointing State of the Nation Address with regard specifically to our economic direction it is incumbent on the Minister of Finance to give clear directions. The global financial crisis is now also impacting negatively on state finances. The current political debate about the nationalisation of the SARB is not helping. Without discipline being maintained through the SARB we will lose international investments and our economy will be seriously exposed. It should be clear to everyone that 2010 is supposed to be the year to boost the economy, not to damage it.

We see a slightly altered outlook for the recovery of the economy in 2010 and COPE would like to see the Minister of Finance playing it safe in his budget and adhering to the sound principles that will keep the South African economy properly anchored in these stormy times. This is the time for consolidation, not experimentation!

South Africa cannot move forward without taking into consideration what has happened since then in respect of the South African and world economic conditions. This is not the time for politicians to overrule the Treasury and direct the economy along another path.

Inflation

SARB should continue to monitor inflation and use monetary policy to contain inflation within a conservative inflation target.

COPE insists that all political parties should be united on this issue as any "politically inspired" lifting of the present targets, will result in the lifting of the " anchor" also, and our economy will start drifting into dangerous waters. Historically it has been extremely difficult to keep inflation below a 10% in South Africa. Now, having reached single digit inflation through sound conservative measures, we should not lose the gains of our fiscal prudence. Government must assure the public that the current inflation target will be maintained.

If there was any validity in the notion that inflation stimulated economic growth then why is government not permitting a 100% rise in inflation to achieve corresponding growth?

The value of the RAND

Our ability to control the value of the RAND is very limited. To the extent that is possible, COPE believes that SARB should buy US Dollars when the RAND is strong to assist as a hedge against its becoming stronger and thereby affecting our exports. This has not been done adequately and COPE believes that it should be addressed in sufficient measure when opportunity arises. We recognize, however that we will never be able to emulate China to build up forex reserves to the extent that they have to support their currency.

Deficit / growth

The emerging markets monitor tells a bleak story on SA in comparison with 19 other EME. Out of 20 EME's, South Africa was only attractive in terms of interests rates and equity valuation. It was average in terms of the BOND spread and our currency. In respect of growth, Inflation, budget deficit, current account balance (last) fiscal balance (second last), forex reserves and real interest rates, we were not at all competitive.

Against this and the fact that the spotlight of the world in 2010 will be on state finances (that is whether countries can pay their debt?) - there is no room for not playing it safe.

SA savings are too little and we are forced to borrow capital on the foreign markets and we can therefore not ignore what is happening in the foreign financial markets.

Our government debt is around 30% of GDP. We cannot and dare not allow it to grow beyond 50% of GDP. The IMF has explicitly warned EME's to avoid a rapid growth in government debt and in particular to stay clear from a 50% margin. COPE wants to see, in the coming budget, a clear exit strategy beginning with an immediate reduction in government debt (the projection is 41% of GDP) and a return to the current 30% margin within 3 years.

The current 7.6% of budget deficit should lower ideally to between 5-6% of GDP - this all will anchor the economy and put us on a growth path.

What would COPE like to see in the 2010 Budget.

1. We would like to see a downward trend in debt servicing costs of presently around 5% of GDP back to the 2008/09 figure of 2.4%. This will free up more money in the budget to stimulate growth.
2. The lowering of the budget deficit should remain a focused target - we would like to see a return to fiscal consolidation and discipline. This budget must be clear on this. A clear exit strategy must emerge in this budget. For instance the government wage bill must be curtailed and no increases higher than inflation must be entertained. We should strive for half a percent below inflation increases for the next 3 years.
3. The well-being of our people is important. The need for a National Health Insurance to take care of the poor is a reality- but we need a careful financial analysis of whether we can afford this in 2010. This matter must be addressed in such a way that it does not upset the budget balance. It will be extremely unwise to compromise the economy and the potential for growth relative to other EME's.
4. This budget must be clear on service delivery targets. We must make sure to get value for our RAND. We would like to see an aggressive top down perspective by the Treasury that sets limits which government will be obliged to adhere to and restrict growth in expenditure over the next three years on unnecessary spending to balance the present bottom up approach by Departments. The control of better spending and service delivery will make or break us in the next three years.For example we would like to see a smaller cabinet and all ministries ( office of the Ministers and MEC) should cut there budget by 15% to set the example.
5. We prefer a conservative fiscal approach. However, Treasury can consider to look at the whole fuel levy on petrol/diesel to assist the agriculture, mining and manufacturing industries to lower energy costs in the wake of higher electricity costs.
6. This budget must be careful not to design revenue on projections of economic growth higher than 2% - any presumptions higher will be wrong and risky.
7. Finally, the budget must pave the way to enable the poor to escape permanently from the debt trap in which they have been plunged and from which they will otherwise have no means of escaping