A BETTER WAY OUT

RRather than spending more, SA should address its fiscal problems by using the expertise of the private sector and stimulating the economy in ways that will not cost taxpayers a cent eports that the government intends to spend R40bn-r60bn more to bail out stateowned enterprises (SOES) and stimulate the economy at a time when there is no fiscal room to do so, suggest it is bereft of ideas.

SA’S problems are too complex and deep-seated to be solved by knee-jerk, populist measures like those proposed by President Cyril Ramaphosa after last weekend’s ANC lekgotla.

The government would amend the constitution to allow land expropriation without compensation, he announced, as well as introduce a fiscal stimulus package to support growth.

Normally news that a country is introducing a fiscal stimulus would cause its currency to strengthen in anticipation of faster growth. That the rand dived instead reflects not only the market’s negative reaction to the land reform announcement but deep scepticism over the state’s ability to use public spending to boost growth.

There are two reasons to be sceptical: the government doesn’t have any additional funds to mount a meaningful stimulus and, even if it did, it is hopeless at turning wealth into wellbeing.

In any event, there are better ways of stimulating growth than funnelling more funds into the maw of bureaucracy.

“You can’t keep throwing money at a problem when the problem is inefficiency,” says Citibank economist Gina Schoeman. “You need to stimulate the economy by increasing certainty and business confidence and by getting the private sector to invest.”

The National Treasury has subsequently clarified that the stimulus package “will be funded through the reprioritisation of existing budgetary resources”. In other words, by shuffling funding within the expenditure envelope, not increasing the size of the envelope. There is simply no new money for this scheme.

Fiscal numbers for the three months ending

June show that SA is likely to experience a full-year shortfall of about

R19bn in personal income tax collection and R8bn in corporate income tax collection as a result of weak demand and low growth, says Schoeman.

This suggests that even if expenditure remains on track, SA will likely fail to meet its debt-stabilisation targets again this financial year.

Unfortunately, expenditure is likely to overshoot, given reports that financially distressed SOES, including SAA, Sanral and the SA Post Office, are going to require a fresh bailout of up to R60bn.

This R60bn, were it to be handed over, would not fund productive, new investments to stimulate growth; it would be used to prop up the balance sheets of entities so deep in debt they need state help to continue as going concerns.

The fiscal stimulus package, according to Ramaphosa’s statement, will include greater investment in public infrastructure, entrepreneurship and training, as well as trade support and local procurement measures.

(This should not be confused with Ramaphosa’s drive to secure $100bn in foreign and domestic fixed investment from both the private sector and foreign governments.)

The problem with any fiscal stimulus package is that government’s spending efficiency is so low that there is only a tenuous link between higher spending and better socioeconomic outcomes.

In a 2015 study, the Boston Consulting Group tried to measure the size of this link and compare it across nations. It ranked SA 138th out of 149 countries, below many of its Sub-saharan African neighbours, all other Brics countries, and other developing nations such as Poland and Romania.

SA’S deficiencies are particularly striking with respect to health care and education. For instance, we spend proportionately much more on education than Kenya, Zambia and Ghana, yet their education outcomes are almost twice as good as SA’S.

With the scope for further fiscal spending constrained by the size of the budget, a limited tax base and the failure of the economy to grow, the government has to improve the quality and efficiency of state spending.

But with corruption having reduced state capacity to a record low, the only way out is to rope in the efficiency of the private sector — through public-private partnerships and the sale of equity stakes in SOES, and by creating a more business-friendly environment.

Steps government could take to stimulate the economy — without costing taxpayers a cent — include cutting the red tape that strangles entrepreneurs, clearing away regulatory and licensing hurdles in telecoms and mining, and easing visa requirements to make it easier for tourists and highly skilled people to enter SA.

To restore confidence and get growth going will require credible measures like these. Vague, unfunded promises fool no-one.

What it means: SA’S spending efficiency and fiscal space is so compromised that promises to mount a new fiscal stimulus package lack credibility You can’t keep throwing money at a problem when the problem is inefficiency Gina Schoeman