Economic governance, not fiscal trickery, is the way out of our crisis
Three seemingly unrelated but important incidents occurred during the week preceding the mediumterm budget policy statement (MTBPS) by finance minister Enoch Godongwana on Wednesday. Taken together, they provide real examples of issues that have brought South Africa to a potential fiscal crisis.
The first was the admission by KwaZulu-Natal MEC for economic development, tourism & environmental affairs Siboniso Duma that the provincial government had for some unknown reason decided to commit R28m to the hosting of the South African Music Awards (Samas) — R20m more than the R8m requested by the organisers. I will not speculate, but readers who remember that this is the year before an election will not be too surprised by this act of apparent generosity.
The second was a presentation by academic and former National Treasury official Michael Sachs at the Drakensberg Inclusive Growth Forum that elicited a squeamish murmur from participants. Sachs stated the obvious, that growth in South Africa’s economy and tax revenues has historically been triggered mainly by demand for mining commodities, not the ingenuity of a former president, finance minister or Reserve Bank governor.
The third was the auditor-general reporting that in financial year 2021 municipalities paid R1.26bn to consultants to perform basic financial accounting tasks for which municipal officials are already being paid more than R10bn in salaries. Despite this, 75% of municipal financial statements and reports had errors. Most municipalities barely function and struggle to consistently deliver basic services to homes and businesses, if at all.
In his speech, Godongwana referred to all three themes in explaining why the government has had to cut expenditure to prevent bigger financial issues later. First, he said, the main budget deficit has increased by nearly R55bn, the outcome of “a sharp fall in corporate income tax, particularly from the mining sector”. In last year’s budget the government had received windfall revenues resulting from a post-Covid spike in demand for mining commodities.
This is not the first time this has happened. The previous, sustained commodities boom was driven by China’s decision to build infrastructure and new cities at a frightening pace. In turn, this grew the Chinese economy by the size of the Australian economy every year for more than five years.
In that time, 2002 to 2008, South Africa saw unprecedented annual economic growth, as high as 5.6% in 2005, with unemployment falling by 11 percentage points to 21% by the middle of 2008. As a result, the government was able to provide greater tax relief to lower-income earners and increased state grant recipients from 3-million to 16-million. By the time the global financial crisis peaked during the second half of 2008, South Africa’s fiscal position was so strong that the then president Kgalema Motlanthe was able to announce a fiscal investment package exceeding R730bn over five years. This was to be spent on preparing for the Fifa World Cup 2010, building power stations and other infrastructure. Of course, much of this was stolen, as we now know.
Godongwana also lamented the impact of loadshedding (Eskom), Transnet problems and failing water infrastructure. While Eskom and Transnet are in the news almost daily, he spoke of water infrastructure in the context of municipal failures.
“Over the years, we have seen the impact of poor water management leading to polluted water sources and limited access to clean water for our citizens. This has largely been caused by the dysfunctionality of many of our municipalities,” he said.
He wasn’t done, complaining that “inefficiencies and wastage of scarce public resources is limiting our ability to effectively support service delivery and economic growth”.
Though most have focused on expenditure cuts, it is more important to focus on the underlying causes. In effect, the finance minister says South Africa has a governance problem. I agree. It also has an economic management problem, which he did not touch on but is critical if we are to sustainably turn the economic corner.
The most important message from the MTBPS is that governing effectively is crucial to economic growth. The quality of the decisions taken and the efficient use of public funds determine future obstacles or opportunities. In our case, they have resulted in deeply embedded obstacles.
It is common practice for government departments and agencies to overpay for services, or to engage private contractors for what should be done internally. This is money that could be spent on critical priorities but is wasted and stolen through contracts inflated for kickbacks. There would hardly be a fiscal crisis if we did not have the combination of maladministration and corruption.
We also have a profound economic management problem. As critical as the mining sector is, a stated goal must be to diversify our export base. We cannot continue to over-rely on commodities exports for lopsided economic and state revenue growth. We are now seeing how risky that is.
The MTBPS plots two scenarios for GDP growth. In the negative scenario, it “assumes economic growth in China slows significantly, causing the terms of trade to deteriorate due to lower export commodity prices and elevated oil prices”. (See accompanying graphic.)
Most commodity-producing countries are pricetakers, with only Opec having the power and ability to set prices. This means a specific goal to improve alternative cushions to adverse developments elsewhere.
In the short term, this means the tourism, agriculture and services sectors, to which the minister referred. But these sectors are hampered by government failure. Farmers and agriprocessing plants use hundreds of litres of expensive diesel every month because Eskom is failing. They are sinking boreholes that should be unnecessary if municipalities and regional water authorities were doing their job.
Road infrastructure to some of South Africa’s prime tourism areas is appalling. Tourism metros such as eThekwini look dilapidated and abandoned, while councillors engage in fistfights over unspent budgets. Such political decay and incapacity cannot be resolved by fiscal magicmaking, which makes the long and obsessive gaze on what any finance minister can do as pointless as it is depressing.
South Africans habitually demand new policy ideas to get us out of the crisis, and while this is important, the truth is that we are not getting the basics right. Getting the basics right is not difficult if the political culture changes, which can only be delivered by new hands at the Union Buildings and in parliament.
The KwaZulu-Natal government’s excessive contribution to the Samas ceremony shows that it does not know how to spend those funds in an economically productive way. This is not a policy ideas problem but one to do with leadership quality, institutional capacity and ethics.
Until we change political leadership overall, our crisis will deepen alongside the socioeconomic crises afflicting millions across the land. Nothing demonstrates this more than the fact that if we fixed Eskom, Transnet, water infrastructure, municipalities and crime, investment would almost instantly return.
But we won’t because we cannot, and various interests are gaining from state failure. South Africa needs a new political alternative with energetic leadership unencumbered by those same interests to drive the fundamental change we all need. For this, the country does not have to wait for the coffers to empty, for there is an election next year.