Consolidating government finances, and
Cyril Ramaphosa needs to build broad political and public consensus if he is to have any chance of pursuing his fiscal and structural reform agenda
South Africa has embarked on its most politically ambitious consolidation of government finances since 1994. The consolidation will be the most challenging to implement and sustain over the five-year timetable set by the treasury. The biggest challenge arises from the government’s failure to mobilise citizens and build a strong political coalition in support of the deep cuts in public expenditure.
And the best way to illustrate this risk is through Ernest Hemingway’s The Old Man and the Sea. It’s a story of Santiago (the old man) who, after 84 days of not catching any fish, eventually makes the biggest catch of his life, a marlin. After wrestling the marlin for three days, Santiago heads home. But along the way sharks took bites at his catch, leaving a skeletal carcass of the big fish.
The risk to the budget consolidation is that the most organised losers, the biggest of whom are government employees, take bites at the consolidation plan. Communities, too, will likely join in as they fight back against the decline in the quality and quantity of public services, including health and education.
This challenge is compounded by the fact that the consolidation comes after more than 10 years of decline in the quality of public services. In addition, it arises as the country is battling the Covid-19 pandemic and its devastating effects on jobs, education and poverty. The current round of fiscal consolidation will tip the key public services, such as health and education, over the cliff. The treasury confessed in its 2021 budget review that cuts will lead to a decline in the quality of public education, especially in no-fee schools.
The biggest adjustment falls on the public-sector wage bill. The government may have won the opening skirmishes, but five years is a very long time in politics. In between, politicians will have to hit the road to campaign for local, national and provincial elections. Within that period, the ANC will also have its own leadership elections. The ballots might send a chill down the spines of politicians, especially at local and provincial levels, creating pressure from those levels upwards to national leadership.
The government blinked recently when it offered unions an R18-billion sweetener, an amount that was not budgeted for. For the government to remain within the expenditure ceiling announced in the February budget, it has no option but to find the R18-billion from other budget lines. That means more cuts in the provision of public services or planned capital investment. In both cases, the biggest burden of those cuts will fall on the poor, who are the most dependent on public services such as health and education.
The budget cuts also come at a time when the government is beginning to implement some of the reforms it
has been promising for many years. These overdue reforms are necessary to place the economy on a stronger, more sustainable growth path. The economy, which has been in the doldrums for more than a decade, took a big hit in 2020 after the government shut down a big chunk of economic activity to reduce opportunities for the spread of Covid-19.
Michael Sachs, the former deputy director general responsible for the budget office at the treasury, describes the projected cuts in government expenditure thus: “If executed, this would be the largest contraction in government spending since the transition to democracy, far larger than the programme associated with Gear [the growth, employment and redistribution programme] and coming after a decade of ‘austerity without consolidation’.”
Sachs, who is now an associate professor at the University of the Witwatersrand (Wits), says there has been rising pressure on the delivery of education and health services over the past decade.
The number of permanent educators fell 4% between 2010 and 2016, resulting in an increase in class sizes. This has meant each teacher had more students to look after.
Health budgets have stagnated since 2012, but costs have continued to increase, creating a tight squeeze on the provision of provincial health services. Salaries and occupation-specific salary increases were the main cost drivers. At the same time, the use of public-health facilities had been growing faster than budgets, adding pressure to the health system already starved of financial resources.
“These trends in health and education spending indicate a real erosion of the value of core public services over the last decade. This resulted largely from the combination of constrained budget ceilings and rising pay for public sector workers. Instead of resolving this contradiction one way or another, it has been allowed to fester. In effect, the burden of adjustment
has been displaced onto users of public services, including the poorest South Africans,” Sachs writes in a paper, Fiscal Dimensions of South Africa’s Crisis, published earlier this year by the Southern Centre for Inequality Studies at Wits.
Sachs’s calculation is that the planned budget cuts amount to a slashing of 14% of spending in real terms (meaning after eliminating the effects of inflation), a cut he describes as “so extreme that it is neither possible nor desirable”.
“The attempt at large fiscal adjustment would impose unsustainable social pressures and choke off the (economic) recovery, adding to the shock to livelihoods imposed by the Covid-19 catastrophe, ” writes Sachs, questioning the political feasibility of the consolidation path.
He adds: “At the very least, the incidence of the blow (if it to be inflicted) will be resisted, and the ensuing negotiations could have unpredictable consequences. In my view, it is unlikely that [the] government will muster the political energy to sustain
such a large adjustment into the next general election.”
Key to Sachs’s point is the fact that South Africa’s management of public finances since 1994 has rested on what he calls an “implicit fiscal bargain”, which has two pillars. The first has been relatively high levels of taxation of affluent households to finance public expenditure such as social grants, universal access to basic education and healthcare. The second pillar has been the greater reliance by the affluent on the private sector for the delivery of pensions, education, healthcare, security and infrastructure. The fiscal crisis disturbs, if not changes, this balance.
Four other economists take Sachs’s point further. Brian Levy, Alan Hirsch, Vinothan Naidoo and Musa Nxele — all with the Nelson Mandela School of Governance at the University of Cape Town — argue in a recent paper, South Africa: When Strong Institutions and Massive Inequalities Collide, that for a country to develop it needs ideas, institutions, and growth to reinforce one another in “a virtuous developmental spiral”.
“Ideas offer hope by encouraging co-operation and the pursuit of opportunities for win-win gains. Institutions assure that the bargains underpinning cooperation will be monitored and enforced. Together, ideas and institutions provide credible commitment, which fuels economic growth,” they write. “However, such a benign scenario does not reckon with the ways in which persistent high inequality, accompanied by unresolved tensions between the distribution of economic and political power, can both put pressure on institutions and quickly change hope into anger. The result can be a cascading set of pressures and an accelerating downward spiral.”
South Africa is already experiencing the effects of the change from hope to anger. “In the face of thwarted opportunity, an increasing number of South Africans came to see the privilege enjoyed by the mostly white economic elite — and the tide of apparent corruption that seemed to be the only way that new elites could share in that privilege — as a provocation,” write Levy, Hirsch, Naidoo and Nxele.
If Sachs is right, the government’s failure to build broad political support for the consolidation measures will raise the anger levels more. That’s because those segments of society, in particular the poor, have already been carrying a disproportionate share of the cuts in government expenditure and the decline in the quality of public services over the past decade — the economic effects of the Covid-19 pandemic have merely compounded this. Further cuts will make the situation worse.
Sachs concludes that the resolution of South Africa’s fiscal crisis depends on faster economic growth, and that growth must be led by the private sector. However, he cautions that even if economic growth were to speed up, there would have to be changes to the
public economy. In particular, there would have to be increases in taxes, accompanied by further reductions in public consumption. Tax increases will fall on the affluent, but will also affect middle-income earners. Further reductions in public expenditure will hit the poor hardest.
Implicit in all of this is the need for the renegotiation of the fiscal bargain, which, if successfully done, can create a supportive environment for the fiscal adjustment that South Africa requires. Levy, Hirsch, Naidoo and Nxele refer to the need
to initiate a new cycle of renewal in South Africa. Such renewal would require “a set of ideas that address in a ‘good enough’ way the imbalances that resulted in the derailment — including a readiness to challenge incumbent interests that had blocked change”.
That takes us to the political economy of reform. The key elements of political economy, according to the World Bank, include how people, as individuals and groups interact to pursue specific interests, given different ideas, means of influence and
access to institutions. South Africa already has a wide range of trigger points for resistance to further budget cuts and economic reforms. These measures — budget cuts and economic reforms — generate their own losers and winners. However, in some cases, they overlap. Losers, on the other hand, differ in their organisational ability and capacity to mount effective opposition to budget cuts or economic reforms.
The government is already fighting organised labour over its wage bill. Then there are fights brewing between the government and labour over state-owned entities. A major fight is underway at Eskom over wages, and the issue of splitting the utility into separate generation, transmission and distribution businesses will soon also rear its head. Assets, liabilities and employees will accordingly be apportioned to each of the businesses.
Of the three, the generation business will most likely be worse off financially. The business carries some very old power stations, whose maintenance is very costly. As soon as the country has mobilised new generation capacity, the oldest power stations will have to be shut, which will mean laying off some employees.
Municipalities are another battlefront. They are at their weakest since 1994, both operationally and financially. They owe Eskom billions of rands for electricity and are, in turn, owed billions of rands by residents for services rendered. This means they have not been able to collect revenue from residents or, rather, are lacking the political will to do so. Any attempts to stand firm will most likely result in a revolt by residents. The number of protests has increased significantly over the past decade. These have been about the lack of delivery of public services, including electricity. Access to electricity has political dimensions. It is already a highly contested area because of the failure of the government’s free basic electricity grant, which was meant to cushion the poor.
W hat political shape or form each of these battles take is not easy to tell. Much will depend on the organisational ability of those affected by government reforms, including budget cuts. However, the fact that South Africa has two elections coming up, starting with local government elections, which now look set to take place during the first half of 2022, and then national and provincial elections in 2024 leaves the governing party vulnerable politically. This is made worse by the fact that the ANC has its own internal ructions, which will shape the outcomes of its national leadership elections in 2022.
Managing all of these electoral processes can complicate the lives of even the most astute and consummate of politicians. It requires a delicate balancing of conflicting interests. The effects of economic reforms and budget cuts create too many enemies for those who drive the reform agenda. A five-year reform agenda is just too long, given the political circumstances. This is even more so when politicians have elections to fight. Doing so, without a strong political coalition, is a mission impossible.
British historian Peter Clarke sums up the challenge more eloquently when he says that nothing can get done in democratic politics without mobilising political support.
“If leadership is partly a question of vision about the direction in which policy ought to be developed, it is also a matter of protecting electoral appeal and putting together a winning coalition of effective support. It is a problem which can be tackled in very different ways, with the stress falling, for example, on rational persuasion, on executive efficiency, on charismatic oratory, on party organisation, on institutional powerbroking or on high-political scheming,” writes Clarke in A Question of Leadership: From Gladstone to Thatcher.
President Cyril Ramaphosa has not rallied citizens behind his reform agenda. Leaving reforms — both fiscal and structural — of the magnitude required to get South Africa growing again and to rebalance its fiscal books to chance is a serious political gamble. He may have hooked his marlin but he risks getting to the shore with a skeletal carcass.