#SONA2016 - Zuma serious about spending cuts

President Jacob Zuma delivered one of his toughest State of the Nation Addresses on Thursday night since taking office in 2009.

President Jacob Zuma delivered one of his toughest State of the Nation Addresses (SONA) on Thursday night since taking office in 2009. It was not only that the EFF spent an hour disrupting the proceedings in the national assembly, but his speech took place within the context of a weakened economy, declining currency, high inflation, a slowdown in GDP, and the possibility that the country could be facing a possible downgrade by ratings agencies.

It was the ruling African National Congress that stated prior to the speech that the SONA needed to provide hope to the unemployed amidst the current tough economic conditions. It was the ANC’s hope that the SONA would help to restore economic confidence.

These sentiments were echoed by the ANC’s alliance partner COSATU, which went as far as to say the SONA was being held at a time when the nation was “crying out for bold and decisive leadership.” COSATU’s primary concern was for the plight of the country’s workers which have been “ravaged by retrenchments, shrinking wages, rising food prices, energy and transport prices.” COSATU has voiced its concern that unemployment is sitting at 34 percent, retrenchments are ongoing, and the economy has not been absorbing new entrants into the labour market. COSATU’s Spokesperson Sizwe Pamla said prior to the SONA, “something drastic needs to be done, and SONA must articulate that.”

As for the banking sector, there was widespread consensus that the SONA needed to provide detailed economic plans and commitments, the most immediate priority being the need for the SONA to send a clear message to the rating agencies that everything necessary will be done to address issues in a bid to avert a further downgrade. The MD of the Banking Association of South Africa, Cas Coovadia, has argued that the government needs to create an environment to attract local and global investment.

Plans

When President Zuma finally managed to address the national assembly following the EFF’s departure from the house, he outlined government’s understanding of the root causes of South Africa’s economic challenges, highlighted measures taken to engage the business sector, and identified plans in which to curb government spending. The announcement of such austerity measures was warmly welcomed by members of Parliament, and will undoubtedly be well received by the business community.

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The President’s analysis of why the economy is struggling pointed first to the international economic environment where he described the financial markets as volatile, the currencies of emerging market economies as weak and fluctuating, and the low prices of gold, platinum, and other minerals as being a challenge.

Particular mention was made of the similar challenges faced by the country’s BRICS partners, where the economies of Russia and Brazil are expected to contract this year, and China will not register its expected economic growth in 2016. Zuma also identified what the executive perceives to be the domestic reasons for the country’s economic problems, noting that electricity shortages and unstable industrial relations remained a challenge.

To Zuma’s credit, he did not downplay the economic challenges the nation still faces, where the economy may grow less than 1 percent this year, revenue collection will be lower than expected, and, if the country is downgraded, it will be more expensive to borrow money from abroad, making it increasingly difficult to finance programs for the poor. An important acknowledgment was that the country is in need of a turn around plan. The President’s emphasis on the need for business, labour and government to solve problems together before they escalate, was key in terms of how the country can move forward to address its common challenges.

CEO engagement

The President made particular reference to his engagement with CEOs in the business community prior to the SONA, and noted their suggestions on how to turn the economy around. He specifically referred to government’s creation of a One-Stop Shop Investment Initiative, which will be implemented in partnership with the private sector. The fact that Zuma has committed the government to removing red tape and regulatory blockages will have been well received by the private sector.

In an important message to foreign investors, Zuma highlighted the fact that South Africa came in the top ten out of 140 countries in the World Economic Forum’s Global Competitiveness Report for 2015/16. The President mentioned that this was fundamental for South Africa to become a financial sector hub for Africa.

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Perhaps one of the most important announcements of this year’s SONA was the commitment of this government to cut wasteful expenditure without compromising service delivery. Zuma dedicated a significant amount of time to the cost-containment measures which his government would implement. This comes on the heels of the announcements made last year by Tanzania’s newly elected President Magufuli, who set an important example by slashing government spending on official travel, state dinners, and perks for government officials.

It was largely unexpected that the President would announce that overseas trips by government officials would be curtailed, the size of official delegations reduced, and restrictions on conferences and entertainment enforced. Even budget vote dinners by government departments will be done away with. The President urged State Owned Enterprises to follow suit with similar cost cutting measures, as well as premiers, mayors, parliament and the judiciary. Whether or not these measures will result in significant revenue saving, the action is of critical importance in the current economic climate.

One of the greatest examples of wasteful expenditure is that the country maintains two capitals – the administrative one being in Pretoria and the legislative one in Cape Town.

This is an issue often discussed in the corridors of power, but never raised at an official level with a view to its being revised. It was only President Mandela who had ventured to question the costliness of such an arrangement, but there was never the necessary political will to consolidate the capitals.

Zuma highlighted the excessive expenditure caused by the executive needing two cars and houses, and the cost of officials travelling up and down and staying in hotels.

The fact that this will now become a project for the executive to look into with a view to making a fundamental change will perhaps be the greatest legacy of the 2016 SONA, which suggests the government is, in fact, serious about its commitment to cutting wasteful expenditure.