Fix for SA slipping away
LOSING GRIP: PUBLIC SECTOR FINANCE IS ON A DOWNWARD SPIRAL
If the country fails to act in time, decisions will be forced on it.
South Africa’s public finances are in a perilous state and time to fix it is running out. There are four main reasons for this. First, economic growth is low to nonexistent. Second, tax revenue collection is repeatedly below forecasts. Third, debt levels are now at their highest levels in the post-apartheid era. Fourth, the poor performance of state-owned enterprises is necessitating large-scale government support.
Recent developments since the tabling of the 2019-20 budget in February have only made the situation worse. A downgrade of government debt to junk by a third ratings agency will lead to an outflow of investment and exacerbate matters further.
The state of public finances is the outcome of different dynamics in three, overlapping periods. The first was the period after the 2008 global financial crisis. The second was the period under the continued presidency of Jacob Zuma. And the third was the period since Zuma was succeeded by Cyril Ramaphosa. Careful consideration of these periods contradict widely-circulated claims in the political space.
Some have claimed SA’s woes began with Zuma, but this is not true. The first shock to the economy was the global financial crisis. Others claimed that Zuma is not responsible for poor economic and public finance performance, but this is also not true.
Economic performance should have been able to recover to a much greater degree than it did under his leadership. Government revenue collection seems to have been negatively affected by institutional destabilisation of the SA Revenue Service.
Finally, the deterioration of economic indicators (growth and
employment), along with further underperformance of revenue collection and public finances more broadly, is being laid at the door of Ramaphosa’s presidency. That is simply implausible.
The deterioration can often be linked to factors that preceded Ramaphosa’s replacement of Zuma early last year. Understanding why such claims are likely to be wrong, it is important to understand what the fundamental drivers are behind the country’s current state and future trajectory.
Unfortunately, beyond blame, much of the policy discussion is characterised by recycled disagreements. These date to the era in which the ANC government adopted the growth, employment and redistribution strategy, which was opposed by left-wing parts of the ANC alliance. That strategy was largely to do with reducing the debt the new government inherited.
For example, left-wing commentators have argued for increasing government spending significantly. They have also claimed National Treasury implemented austerity after 2008. This is incoherent.
First, SA adopted a “countercyclical” approach after 2008: government spending increased faster than revenue. Second, increasing government expenditure is a very high risk strategy. If it does not deliver significant increases in economic growth and tax collection, it will lead to a big deterioration in public finances. These risks are never cited by populists who regurgitate arguments of earlier eras.
The reality is that although Treasury attempted to maintain government spending to support the economy after the global financial crisis, and then tried to stabilise debt levels using “fiscal consolidation”, it has been unable to do either. The economy has not recovered, arguably due largely to state capture and other state failures in the Zuma era. Debt targets have been missed. At one point, national government debt was expected to stabilise below 45% of GDP, now it is above 60%.
Recent developments have made the situation more dire. In the 2019 budget, Treasury indicated it would have to breach its expenditure ceiling for the first time to give Eskom support of R23 billion a year for 10 years. Since then, government has tabled another proposal to give Eskom R59 billion more so debt targets will be exceeded again.
And other risks, like SAA, the Road Accident Fund and medical negligence lawsuits, linger in the background. Economic growth and job creation are virtually nonexistent, and below population growth. This means a higher unemployment rate.
The only way to proceed is to secure a societal agreement on the way ahead that recognises the need for sacrifices. Ramaphosa is uniquely equipped to secure a social compact of this kind. But he is moving too slowly. And if the country fails to agree in time, decisions will be forced on it. And there will be less opportunity to protect vulnerable citizens.
– Seán Mfundza Muller: Public and Environmental Economics Research Centre, UJ
Economic growth, job creation are nonexistent