No one likes to cut budgets, though in the private sector it is part of doing business. When revenue dips, you have to reduce costs – there is no alternative. To run a business by merely getting deeper into debt amounts to reckless trading, which is illegal in company law. The government has steadily built a large debt load since the financial crisis in 2008 when revenue first dipped dramatically compared to expenditure. It cannot go on any longer without facing bankruptcy. We have lost our investment credit rating, pushing up the cost of debt just as revenue is taking a major blow.
But it is the first time in the history of democratic SA that the public sector is having to cut budgets widely and deeply. Between the Budget that was announced in February and the MTBPS, the three-year expenditure framework has shifted dramatically. Budgets for next year will now be R60-billion lower than they were going to be in February and R89-billion lower in 2022/23. Provinces are seeing their budgets cut by 5.1% across the board. National departments are being cut by 5.4%. Local government is losing 4.4%.
Will the finance ministry prevail in enforcing these cuts? It must if we are to retain our sovereignty. Failure will lead to financial collapse and draconian conditions imposed on the country by emergency lenders. The path that the finance minister set out sees debt reach a peak of 95% of GDP in five years’ time. That is already in the danger zone, putting us at levels above other countries, like Argentina and Ecuador, that have recently defaulted. The only way we will withstand these levels is if lenders are confident that we have a plan, that this peak really will be the top. A loss in faith of lenders will lead to a crisis that will see GDP and social spending collapse.
Between now and next February there is going to be an almighty tussle as politics clash with these fiscal realities. Our financial health has already been the casualty of politics in many ways, most recently with the decision to fund SAA with R10.5-billion. There will undoubtedly be fierce political resistance to these reductions as all levels of government realise how painful they will be. The biggest clash, of course, will be over the public sector wage bill. The National Treasury has said it will aim to protect spending on infrastructure, investment that is required to kickstart our economy and is central to the economic recovery plan presented by the president. So, non-investment lines of budgets are being cut most, with the wage bill the chief casualty.
What advice can business offer to those civil servants who now must figure out how to implement cuts? Well, it won’t feel like it now, but the first thing to recognise is that you will be stronger for it. Cost-cutting forces one to find more efficient ways of doing things. Business is ultimately about delivering products and services to customers and cost-cutting has to happen in ways that don’t interrupt output. The public sector needs to think along these lines too.
Services to the public must be protected as far as possible. You won’t do that by looking for one big saving – savings have to be found in every nook and cranny of your operation. Look for ways to reorganise how your production line works. Eliminate duplication where you have teams doing similar tasks by finding ways to combine them. Obviously, discretionary perks can go easily – the entertainment and training events can be combined. Every institution has a “miscellaneous” spending line covering consumables that can take a 20% reduction. Ultimately, you need to build a culture of efficiency that makes everyone think twice about how they do things and to always take the cheaper alternative.
A Harvard Business Review article makes the point that cuts are a good time to sort out legacy HR issues. That doesn’t mean firing people, but rather taking the decisions to fix job roles and fill vacancies that cause unnecessary cost. Restructure the jobs of less than fully busy people to get more from them. If you have to cut the use of outside suppliers, you are going to have to rely more on your own people. Understand where you fit within wider supply chains and engage both backward and forward linkages to discuss if you can find efficiency gains on both sides.
There is wider literature on the peculiar challenges of cost-cutting as a management discipline. This hasn’t needed to be taken seriously in the public sector to date. But now it is time to change. Civil servants have less than six months to undertake a crash course to achieve a major culture change. It feels like so little time. BM/DM
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The discipline of cost-cutting: How and why government needs to cut budgets
The Medium-Term Budget Policy Statement (MTBPS) is meant to be the midpoint of the budget cycle for the government, but this year the changes announced are so significant it feels like there is remarkably little time before the February Budget. What will make the time fly by is that all levels of government are faced with an unprecedented requirement to cut costs.
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