If we need more debt, let’s put it to work
SA Inc now has 90 days to make its story of “reform” more convincing, and credible. For many pessimistic pundits, it might seem to be a three-month wait for a slow-motion train wreck
— an inevitable ratings downgrade by Moody’s Investors Service.
Many might hope the “brothers from Manhattan”, as Patrick Bond refers to them, will exercise mercy. They are certainly not known for that.
From a fiscal perspective, which is what the ratings agencies will be following closely before the February budget, it is important to consider one of the metrics Moody’s will be looking at — the debt-to-GDP ratio.
The growth of the numerator has to be closely linked to whatever improvements we envisage in the denominator. This is the crux of the matter.
Without a clear growth strategy, with wide buy-in and credible design, piling on more debt in the hope of growth through demand improvements, or more aggressive cutbacks in spending, may — as Naomi Klein puts it —“kill the patient”.
Put differently, if we are to increase our borrowing requirements, it has to be growth enhancing. The Treasury suggested in its budget review a few weeks ago (rather ominously) something we’ve known for a while but might not have fully understood: rising debt service costs (in the absence of growth and the accompanying rise in tax receipts) are “crowding out” much-needed social and economic expenditure.
In the past few years — as we’ve seen with medicine stock-outs in clinics and the lack of vitality in the construction sector — expenditure on goods and services and capital spend have taken the haircut. It seems now that transfers to provinces and municipalities will be added to the areas where the shave needs to happen. We must ask: what will this mean for the denominator (output or GDP)?
Depending on who one asks, some suggest (rightfully) that excessive debt is anti-growth. Perhaps it may be a good time for SA to accept that we have a demand-side challenge. If we accept this, the strategy to improve the denominator will have to do with measures that stimulate aggregate demand.
But it doesn’t end there, we need measures that not only stimulate consumptive demand but also invest in future aggregate demand.
With this future in mind, reductions in capital expenditure to different tiers of the state are not a good idea. Nor perhaps is the fact that many of these provinces and municipalities fail to spend this money. If we are to accept that in the medium term there will be relatively higher levels of debt relative to output, the key consideration is which kinds of spending areas we can finance from here onward. The answer to this may have a lot to do with two of the fastest-rising expenditure items in the public budget: debt servicing and public sector wages.
The debt hunger of Eskom is a national risk that requires urgent attention. We would do well to consider some of the suggestions for how we restructure this debt on their merits. Some of these relate to absorbing some of the debt onto the national balance sheet, renegotiating with creditors, restructuring through special purpose vehicles (to limit interest costs) and — as Cosatu’s Matthew Parks has suggested — leveraging some of the international climate funds on offer as we consider a just transition away from fossil fuel based energy.
There is also a need to improve the efficacy of capital spending in state-owned enterprises. Only when projects come online, within agreed time frames and budgets, will they be growth enhancing.
Lastly, when it comes to the public sector wage bill, the discussion ought to occur in a manner that enhances the delivery capabilities that make the state an ethical and developmental one. For this to happen, the messaging must not only be about money cuts but also about vacancies across front-line functions and the reconfiguration of the interface between administrative and service-focused functions.
Police officers should be catching rapists and murderers, not bogged down “certifying” documents. Teachers must teach and impart knowledge rather than be stuck in admin.
The panic bred by mismanagement and systemic crises must not blind us to the task of reconstructing the state. If done well in a manner that strengthens the investments current and long term) in the social wage, this can improve the GDP denominator and give us some reprieve from the voyeuristic glance of the “brothers from Manhattan”.