Restore confidence now, then work to lift productivity

The World Bank forecasts that the economy will grow 1.1% in 2018. This is slightly faster than 0.8% in 2017 but it is still much slower than SA’s population is increasing and is totally inadequate to tackle unemployment, poverty and inequality. Nor can it generate increased tax revenue to fund critical government services.

The World Bank forecasts that Africa will grow 3.3% in 2018, while collective global growth of 3.1% is expected.

There is only one way to escape SA’s position of global and continental laggard. SA must invest much more to expand the stock of factories and machines and set them to work providing infrastructure to power higher levels of economic activity. In the process, many more jobs must be created for people whose productivity has been enhanced through meaningful education and improved skills.

Such changes will take years. In the short term, improved growth depends on informed policy choices. The government needs to focus on setting the foundations for higher growth in the mid-term.

Fully 60% of GDP is represented by household spending. Citizens provide the largest component of economic activity, but for as long as household income stagnates, we can expect little growth.

A decade of slow growth has caused an alarming fall-off in job creation and the damping down of wage growth to only slightly more than inflation.

Tax increases to tackle the government’s revenue shortfalls will further constrain what is available for households to spend in the coming years.

Limited relief is available to the many households struggling with high debt. This could come in the form of reduced interest rates during 2018 because inflation has fallen.

Real increases in government consumption expenditure — the secondlargest component of domestic spending — are unlikely for several years. Shortfalls in tax collection and the growing interest burden on government borrowing leave little scope for spending increases. Instead, the focus will have to be on reprioritising spending to fit reduced revenue forecasts and accommodate unbudgeted increases in higher education.

If growth is to accelerate beyond current modest forecasts, it can only come through higher-than-expected increases in the remaining components of GDP, investment and exports. This may be possible if the government acts wisely.

Improved global economic growth provides a helpful backdrop for increasing exports. Commodity prices are rising in response to demand. It is critical that producers respond by expanding production of export goods.

The vulnerable finances of most state-owned enterprises prevent further borrowing in order to expand, and new investment by the government generally is likely to be an early casualty of its forced reprioritisation in spending. Any pick-up in investment will depend on the private sector.

Higher private sector investment and increased production of goods for export are both contingent on improved investor confidence in the country’s long-term economic future.

There are welcome signals that the new leadership of the ANC is aware of the urgent need to build confidence and reignite economic growth. Encouraging words must be followed by swift policy action. The mismanagement of stateowned enterprises is weighing heavily on assessments of SA’s prospects. Unless swift action is taken, they will require huge bail-outs by the government.

Re-establishing the South African Revenue Service’s capacity for efficiently collecting taxes will demonstrate that the government’s constrained financial situation is sustainably being tackled.

While there is little scope for increasing the quantum of government spending, there is much scope for using existing funds more efficiently.

The impasse between the state and the mining sector — the subject of litigation — must also be tackled. Until this is done, SA’s largest exporters cannot take advantage of higher global commodity prices to increase output. Investors are eager to respond positively to better policies. Swift action is needed by government.

HIGHER PRIVATE SECTOR INVESTMENT AND INCREASED PRODUCTION OF GOODS FOR EXPORT ARE CONTINGENT ON IMPROVED INVESTOR CONFIDENCE TAX INCREASES TO TACKLE THE STATE’S REVENUE SHORTFALLS WILL FURTHER CONSTRAIN WHAT IS AVAILABLE FOR HOUSEHOLDS TO SPEND