Polokwane win slowed growth to crawl

Rival ideologies complicate the already complex challenge of addressing SA’s numerous economic problems. Rival positions are defended resolutely, even against evidence to the contrary. One view claims that many of SA’s problems can be traced back to the decision in 1996 to constrain government spending. Lack of funding, critics of this decision argue, hobbled subsequent efforts to address our education, housing and infrastructure needs. Counterarguments — that inefficiency and poor allocation of available funds were equally responsible — are stoutly resisted.

Central to the debate is the Growth, Employment and Redistribution (Gear) strategy adopted in 1996. A key priority of Gear was to help SA escape the fiscal debt trap inherited in 1994, thereby freeing resources for urgent social needs. A debt trap occurs when borrowings and their interest repayments rise relentlessly. Governments that have overborrowed find themselves in this position. Rising interest payments cut into the funds available for critical areas such as education and health.

In 1996, interest payments accounted for 20% of all government spending — almost as much as the national education budget.

Gear sought to escape this situation by initially reining in government spending. More importantly, it sought to grow the economy so the tax base would grow. Gear saw rising tax revenue from an expanded tax base as the principal mechanism for reducing the government’s annual deficits. In a growing economy, debt and interest payments would fall alongside higher spending.

Gear proposed a range of policies to complement efforts to reduce the deficit, aware that this alone was not a strategy for growth. However, widespread opposition within the ANC alliance to what was perceived as a diminished role for the government in the economy meant few of the other growth requirements were implemented. However, the budget deficit did fall. In 2007 and 2008 there were modest surpluses. Debt almost halved as a percentage of GDP to 25%. Interest paid fell from 20c of every rand spent by the government in 1996 to just 8c in 2009. This freed up a greater share for needed spending, including the rapid expansion of social grants.

After adjusting for inflation, noninterest spending rose 6.3% per annum between 1997 and 2008. This allowed the government to double its spending on development priorities — an achievement not acknowledged by Gear’s critics. Higher spending was achieved alongside shrinking deficits because the economy grew 3.6% per annum. A buoyant tax base and improved efficiency in tax collection meant government revenue rose rapidly in absolute terms and as a share of GDP at the same time as tax rates were reduced.

The change in ANC leadership at Polokwane in 2007 marked a switch towards a more interventionist economic role for the government. This coincided with the global financial crisis and a dramatic slowdown in economic growth. Growth in SA has never fully recovered. Over the past three years, growth has slowed to a crawl. Government spending since 2009 has risen from 25% to 32% of GDP. Because revenue failed to keep pace, large annual deficits were recorded, requiring more borrowing.

Ironically, increases in government spending after Polokwane were lower than those achieved under Gear. Adjusted for inflation, noninterest spending rose 3.8% annually – nearly half the rate between 1997 and 2008. This is because feeble growth affected tax receipts, while rising interest payments on growing debt reduced funding available for other state spending. Government debt is now back to 50% of GDP and interest absorbs 11c of every government rand spent. We are back in a debt trap.

If SA is given a credit rating downgrade, things will get worse because interest rates will rise. The Treasury has already signalled that tax rates will have to increase in the 2017 budget just to maintain our position. They will not provide new funding for areas where more is urgently needed, such as higher education.

Only faster growth will do this, which is why it needs to become the government’s overriding priority.