Speech by Tim Harris MP, Democratic Alliance Western Cape MP, in the National Council of Provinces, June 25 2009

 Honourable Chairperson, Honourable Ministers, Honourable Colleagues.

Today, in this house, we commemorate the sacrifices made thirty-three years ago by the youth of Soweto when they stood up against the disgraceful education policies of the Apartheid state.

One generation on, my generation is enjoying the freedoms earned by the class of '76, but is still suffering disproportionately from unemployment and lack of opportunity.

The concern I would like to address today is that this Government's ambitious new expenditure plans - announced in the face of lower tax revenues caused by the recession - will pass unreasonable economic costs onto future generations and today's youth.

President Zuma speaks of a desire to "do more", and indeed, this is a noble ambition. But we are in a deep recession, and given the constraints faced by National Treasury, we can do more only by spending more.

The problem is, every day, new indicators show the depth of the economic crisis we are in.  In the first quarter our economy shrunk by 6,4%, manufacturing production has declined by 21,6% and exports have plunged by 55% in value terms.

The most urgent consequence of this decline is its effect on tax revenue. Treasury has already fallen R10bn short in the first two-and-a-half months of this financial year. More alarming, in a briefing to the Finance Committee on Tuesday, the Acting Commissioner of SARS announced that tax revenue is down 11,3% year-on-year.

If tax collection continues at these lower rates - and there is reason to believe the rate may actually worsen, especially given the fact that corporate taxes have not been assessed yet - then the tax take for this financial year could fall short of estimates by anywhere from R40bn to R100bn.

Our economic managers have three options when tax revenues decline so dramatically.  One: they could add new taxes to make up the lost revenue, two: they could cut back on expenditure to help the budget balance, or three: they could run a much bigger budget deficit.

The first option, introducing new taxes in the face of an economic crisis, would be ill-advised. Taxpayers are already suffering the effects of the recession, and as Martin Feldstein pointed out in the Wall Street Journal last month in relation to the Great Depression of the 1930s: "the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment."

With regards to the second option, Government is showing very little appetite to rein in spending. By my count, neither President Zuma nor any of his ministers have so far announced any major cuts in expenditure.

The problem is that, unless spending is cut, then option three - bigger budget deficits - become the default position.  Based on the spending plans tabled in February, and considering the lower tax takes reported by Treasury, the budget deficit for this year could end up at anywhere from 6%-8% of GDP.

According to a recent study by the IMF, this would take us from being one of the most fiscally disciplined countries in the G20 to one of the worst budget deficit offenders.

Now counter-cyclical fiscal policy - which this government and the Opposition both subscribe to - requires governments to run budget deficits in times of economic decline.

But a deficit of this size would be unprecedented since the handover of power from the previous regime - when we were dangerously close to a debt-trap. It would also cause a rise in long-term capital market interest rates due to larger public sector borrowing requirements.  And crucially, it would drive the State's debt - and debt service costs - sky-high.  Much of these costs would have to be paid by the youth of South Africa who make up the next generation.

The alarming thing is that this deficit figure is based on zero increase in expenditure - but each day new plans are announced by the Cabinet.

In the President's State of the Nation address he called for more expanded public work opportunities, more rural development, more social grants, and a National Health Insurance scheme. Other government leaders have announced state support for struggling industries, and bailouts for parastatals.  Then, of course, there are the costs of six extra ministers and eight extra deputy ministers and their departments.

Many of these are admirable initiatives (although many are not) but even with extremely conservative costings, these plans would probably add more than R6bn to government expenditure.  Alarmingly, much of it is current - rather than capital - expenditure, meaning that future generations would not benefit from additional productive capacity despite with the debts they would inherit.

If this government is truly concerned about our youth, they will recognise the sacrifices required and will keep counter-cyclical expenditure to levels that will not pass on a cost burden to future generations.

I thank you.

Source: Democratic Alliance

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