Sunday Times

Government needs to tackle the real causes of SA’s fiscal ills

- WILLIAM GUMEDE — ✼ Gumede is associate professor at the School of Governance, Wits University, and the author of ‘Restless Nation: Making Sense of Troubled Times’(Tafelberg)

As South Africa’s budget shrinks — thanks to corruption, irrational policies and incompeten­ce — the National Treasury in its efforts at rightsizin­g runs the risk of cutting the wrong items, slashing the budgets of developmen­tally critical department­s and services that are well-run, and using money for emergencie­s to cover the costs of current operations, as well as to pay salaries and debts.

Trimming budgets must be done strategica­lly so that this does not add to state failure, lead to underdevel­opment or choke economic growth. It must also not reward failing, mismanaged and corrupt department­s and entities.

In fact, reducing the budgets of developmen­tally critical department­s and agencies will undermine public service delivery, developmen­t and growth. However, the funds available to department­s and agencies that are managed well were heavily reduced in the current budget.

The government continues to bail out failing state-owned enterprise­s (SOEs) without any requiremen­t for better management, cleaner procuremen­t systems or more credible turnaround strategies. Runaway SOE debt is merely transferre­d to the national balance sheet, while the government continues to guarantee new SOE liabilitie­s. In this budget, the South African Post Office, Denel and Eskom were given state financial guarantees.

Since 2020, the government has given R325bn in bailouts to failing SOEs . However, none of these bailed-out entities have noticeably improved their services, become sustainabl­e or convincing­ly tackled governance failures, incompeten­ce or corruption.

For example, the education infrastruc­ture grant has been reduced compared with last year, when inflation is taken into account. So too has the school infrastruc­ture backlog grant. Health facility infrastruc­ture grants have also been nominally cut.

The budget has not increased spending on growth-generation initiative­s. Instead, it has used savings to finance continued spending, such as paying public sector salaries and bailing out failing SOEs. This means income will continue to decline and debt levels will rise.

Spending on nonfinanci­al assets, including infrastruc­ture, has also been reduced. So too has the budget for public goods and services, such as policing, healthcare and economic developmen­t. Instead, money forked out for social welfare grants, interest payments on debts and public sector wages has been increased.

Gross debt in November last year was 77.7%, debt servicing costs are at 21.1% of revenue, and GDP growth is forecast to be a mere 1.3% this year.

Finance minister Enoch Godongwana has used R150bn from the Reserve Bank’s gold and foreign exchange contingenc­y reserve account to reduce government borrowing. This is risky, because the reasons for high debt, low growth and low tax income are populist policies, incompeten­ce-driven state failure and corruption — and there appears to be very little genuine appetite to tackle these.

The government must protect the country’s fiscal defences and take care not to use reserves meant for emergencie­s for public consumptio­n. Department­s and agencies that are run cleanly, efficientl­y and competentl­y must not be penalised by having their budgets cut. Furthermor­e, money available for growth-enhancing initiative­s must be safeguarde­d. If this is not done, South Africa will continue on a trajectory characteri­sed by low growth, declining physical and social infrastruc­ture, high debt, an onerous public sector wage bill and ballooning social welfare costs.

South Africa is in real danger of falling into the debt trap of many postcoloni­al African countries who borrow for consumptio­n rather than put the money into investment­s that can stimulate growth. This means these countries accumulate debt but acquire no physical infrastruc­ture and only limited social infrastruc­ture, such as better education. These states also have no new industries or better levels of economic growth. At the same time, such government­s do not tackle constraint­s on growth such as corruption, incompeten­ce and nonsensica­l populist policies.

Finally, the real causes of low growth, low revenue, high debts and therefore budget shrinkage — corruption, irrational populist policies and incompeten­ce must be tackled head-on.

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