This budget statement comes at a critical time for South Africa. The Zuma administration is poised to reveal the details of its new economic plan, and so South Africans are being presented with a choice. The first is of a society that is centred on the state, the so-called developmental state. This approach actually represents the antithesis of development as it represents unemployment, poverty, cronyism and corruption. It is the ANC's approach. The second option actually engenders development and is a society centred on people and will enhance competitiveness, investment, growth and jobs and will successfully roll-back poverty. It is the opportunity state and it is the DA's approach.

With increasingly mixed signals on macro-economic policy emerging from within the ruling party, and an economy recovering at a pace slower than its capability, South Africans have important choices to make. Our economy needs sustainable, labour absorbing, growth and development.

The DA believes that appropriate economic policies can lift our people out of poverty and create a virtuous cycle of increasing prosperity over successive generations.

The 2010 Medium Term Budget Policy Statement will provide a framework on which the 2011/12 budget will be constructed. It will also set out the fiscal framework for the next three years and budget priorities in the division of revenue between national, provincial and local government. The DA is seriously concerned over the lack of political will to manage the people's money in the best interests of all South Africans. Continual governance and policy failures have resulted in substantial leakage from the public financial system, relentless unemployment and a structural poverty trap.

The Zuma administration has also neglected to implement the much-needed wage subsidy, which Finance Minister Pravin Gordhan committed the administration to in his budget speech. The wage subsidy, endorsed by the Harvard Panel, represents one of the most effective ways of generating employment in our economy by incentivizing employers, through tax deductions, to hire new people.

The role for government in a growth economy

The World Financial Crisis demonstrated the need for an appropriate role for government in our economy. Government should intervene where the market fails, with an objective to ensure that the market can operate more efficiently and that individual choice over the application of limited financial resources is increased. Regulation should focus on stimulating economic activity by easing access for individual entry to the economy. Contrary to expectations that the crisis would lead to increased government intervention in economies across the world, the slowdown in economic activity, and therefore taxation revenue, with widening budget deficits have substantially reduced public finance available for government activity. Consequently, the crisis has brought the role of government sharply into focus.

Mixed signals generated from within the ruling party highlight their misunderstanding of what government can achieve in an economy. Outright nationalisation, or by stealth in the form of state mining and banking companies, introduces further inefficiencies into an economy, increases investment risk and widens the scope for market and governance failure. Government simply cannot provide the number of jobs necessary to sustain a viable economy or to make a substantial impact on poverty reduction. The so-called Developmental State model, driven by State Owned Enterprises, has proven its fundamental flaws. Government cannot be located at the centre of our economy, it must, however, perform an appropriate facilitative role as a significant player in our economy.

Our recovery from recession has lagged those of our counterparts in comparable economies and, at our current recovery rate, GDP growth of between 2.3% and 2.8% is anticipated. This needs to accelerate by at least 4 percentage points to positively impact on unemployment.

Revenue

Following a significant decline in revenue for the 2008/9 fiscal year, actual revenue collected for 2009/10 was slightly higher than estimated. This resulted from stronger domestic consumption as the economy initiated its recovery from recession. It is likely that this upward trend, specifically in personal, company and value added tax will continue. This trajectory, together with efforts from the South African Revenue Services (SARS) to ensure taxpayer compliance, will likely continue and result in revenue estimates for 2010/11, as set out in the consolidated government fiscal framework, being exceeded.

There is growing concern over government's failure to implement the necessary improvements to its procurement practices and to take decisive action to root out corruption in the application of the people's money. This failure increases pressure on the social contract between government and compliant taxpayers and significantly increases the risk of non-compliance by taxpayers whose perception of value added service from government is steadily eroding. This ultimately impacts negatively on poor members of society who rely on resource re-distribution through the taxation and public financial system.

A review of the taxation regime is overdue, given increasingly complex and complicated taxation laws. More innovative fiscal policy is required that will achieve revenue targets and incentivise beneficial economic behaviour. Further initiatives are also necessary to encourage defaulting taxpayers to return to compliance or achieve it for the first time.
Revenue as a percentage of GDP is likely to reach 28% ahead of the 2012/13 target and, consequently, the DA will not support taxation increases.

Expenditure

Government has not taken sufficient steps to restrain its expenditure on unproductive activity. The public sector wage bill, having doubled in five years, has increased well in excess of the rate of inflation, without any productivity improvements or additional service to the people. The outcome of annual audits of government departments reveals a culture of wasteful and opulent spending, without consequence. Updates to the Ministerial Handbook, feedback from the Government Task Team to Effect Savings and progress on the review of the financial model applicable to the state owned enterprises remain outstanding.

Increasing pressure on the social security net, resulting from policy failures that have increased unemployment and poverty, cannot be sustained without crowding out the availability of public finance for investment on the productive side of the economy - especially on infrastructure and education. Proposals to further expand the social security net and introduce a National Health Insurance Scheme have not been subjected to rigorous cost-benefit analysis and will likely accelerate government expenditure to several percentage points above 30% of GDP - the upper limit of an expenditure benchmark that the DA considers to be appropriate.

The year-to-date government expenditure pattern indicates substantial under-expenditure in the first half of the current fiscal year. Local government must serve the people, yet municipalities are not properly assisted with human and financial capacity to ensure effective service delivery. Under-expenditure is evident in areas of fixed capital formation that drive economic growth. It is, thus, evident that, although the remuneration and size of the bureaucracy is increasing, service delivery remains in backlog. The public sector strike highlighted the discrepancies in remuneration and working conditions between the cadre-deployed bureaucratic elite and those who serve on the coal-face of service delivery. More resources are required on the front-line and fewer in the back-offices.

The budget deficit and public debt

Given the revenue overrun and under expenditure patterns, the deficit for 2009/10 is not likely to exceed 7% of GDP and will fall below 6% in the following year. The target to reduce the deficit to 5% by 2011/12 can be achieved in the shorter term if appropriate fiscal discipline is maintained.

Many economies across the world have experienced significant budget deficits following the World Financial Crisis. South Africa's deficit remains manageable in the medium term and the DA believes that a surplus is achievable by 2015/16. Under current conditions, increased taxation and borrowing is not required. By reducing wasteful expenditure, improving efficiency within a streamlined bureaucracy and changing the financial model applicable to state owned enterprises, the deficit can be eliminated. As the economy emerges from recession, and in the implementation of counter-cyclical fiscal policy, decisive steps can be taken to improve our long-term macro-economic stability by building up financial reserves to mitigate future turbulence in the global economy to which South Africa is inexorably connected.

Gross national government debt as a percentage of GDP is rising and will exceed 40%, over R1 trillion, in the next fiscal year. This excludes municipal debt, currently accumulating at a significant pace in the form of municipal bonds. Rising debt servicing costs puts pressure on current expenditure service delivery needs and must be avoided.
The DA believes that excess revenue should be applied to reduce debt, given that the increasing need for additional borrowing to fund the budget shortfall has eased. The upward trajectory of debt re-payments can be reversed. Although additional borrowing can appear attractive in an environment of low interest rates, this can place an unnecessary burden on future generations of taxpayers whose contributions will service the debt and crowd out other applications of scarce financial resources.

Key considerations in the development of the 2011/12 National Budget

The DA believes that fiscal policy, effectively designed, can contribute significantly to the achievement of an Open Opportunity Society that enables all of the people to become everything that they are capable of being. Several key considerations will shape our alternative budget for 2011/12.

Events in the global economy

The global recovery from recession is uneven, with recovery rates in the developing economies, especially in Brazil, Russia, India and China, the so-called BRICs, far outpacing ours and those of the developed economies. As an aspirant member of the BRIC, we must question why our economy is trailing far behind and resolve the structural problems that inhibit our economic growth.

Government concern over the value of the Rand is focussed in the wrong place - on how to depreciate the currency. Given current interest rates, the Rand is attractively priced relative to other currencies, which has resulted in short-term capital inflows that do not improve our medium to long term economic prospects. The introduction of Tobin Taxes in other jurisdictions as a disincentive to short-term inflows, has not achieved its objective in slowing the flow of capital. The DA agrees that the Rand is currently overvalued and impedes crucial export growth. To provide relief in the short term, remaining foreign exchange controls should be scrapped and a monetary policy debate on establishing a lower interest rate regime should be initiated.

The most enduring and effective solution to concern over the value of our currency is to design an economy that is more attractive to long term investment in the productive capacity of our economy. The DA believes that if our economy is an attractive enough investment destination, it will retain capital for a longer duration, invested in our productive capacity, to the benefit of our sustained economic development. Debate on nationalisation drives negative perceptions and uncertainty over the security of investment in South Africa and defeats this objective at the outset.

Value for money government service

Government must offer value for money. Its delivery of required goods and services must be effective and efficient and be offered at a reasonable price. Corruption and patronage increases costs and, therefore, slows down the rate of service delivery to the poorest communities who ultimately pay for the luxuries of those who raid the public purse.

The DA believes that government has failed in its articulated, but not implemented, fight against corruption and that bold and decisive action is required. The influence of the auditor-general needs to be strengthened to ensure that appropriate consequences can be pursued when governance fails within government departments. The procurement process has deteriorated to the extent that National Treasury is no longer able to ensure its integrity against massive leakage through tenderpreneurship, dubious black economic empowerment transactions and other fraudulent activities.

Sustainable social security

At its current acceleration rate, the social security net is becoming increasingly unaffordable and crowding out other priorities. The DA believes that a caring society must demonstrate its support for its vulnerable members, including the aged, the disabled, the young and the unemployed. The problem with the social security net is not that it is generous, but rather that it supports too many recipients. Crucial interventions are required to ensure that the social security framework encourages beneficial economic behaviour. Pension and Social Security reform will partially alleviate the unsustainable burden on available public financial resources.

To ensure that social security remains sustainable in the longer term and that poverty alleviation leads to poverty reduction, more South Africans need to be employed and contribute to the tax revenue pool. Although government cannot provide the jobs itself, it can facilitate an environment that will. A range of "behind the border" initiatives are required to accelerate the establishment of labour absorbing entrepreneurial and small business enterprises, and globally competitive trade and industrial activity.

Quality education and skills acquisition, the basic building block for human development, must be accessible to all.

Progress

Our people aspire to a better life for themselves and for their children. The DA is future focussed and believes that innovation and creativity can be encouraged through fiscal policy interventions. Environmental considerations cannot be ignored and progress must be made in the pursuit of a lower carbon emission economy.

Conclusion

The DA believes that our economy must serve the people and create the opportunity for anyone, irrespective of their circumstances at birth, to achieve all that they are capable of achieving.

South Africans deserve a government that will take seriously its role as facilitator of economic activity for sustainable growth, development and job creation. We deserve a government that understands that it does not have any money of its own and that it is a custodian of the people's money, contributed by hard working taxpayers who deserve a government that will offer best value for money.

The DA believes that it is possible for government to facilitate an environment that will stimulate economic activity and to break the poverty cycle that traps millions of our people - all that is required is the political will to make and implement the right policy choices.