In response to the large, persistent gap between revenues and spending, the Treasury has sought to cap expenditure growth over the past five or six years (though not to cut it) and to raise taxes. These limited actions have failed to arrest SA’s explosive debt path.
Though our debt crisis is mostly the consequence of slow growth rather than its cause, debt is increasingly acting as a brake on growth. Mounting debts have become an increasing burden on the economy and are now themselves slowing growth.
The main mechanism through which high debt levels slow growth is through increased risk — not so much of default as of higher taxes and higher inflation. As these risks rise, so does the cost of capital. And as the cost of capital rises, investment falls.
In this way SA’s past bad decisions devour our future: our ever-expanding debt repayment costs take up an ever-rising share of national income, leaving less and less money to spend on our many national challenges. Debt service charges are now the single-largest item on SA’s budget and growing.
The most likely scenario on present trends is not a fiscal cliff but descent into a swamp: a slow-growing reduction in standards of living, economic growth less than population growth, fewer jobs, less money to maintain infrastructure, less dynamism and change in our society. Life gets progressively harder as we get poorer and poorer. In a country with toxic politics, this is a recipe for ongoing crisis.
SA must change the path we are on. The critical first step is for the government to recognise the scale and depth of the fiscal problem. To some extent, this has happened, and the Treasury and President Cyril Ramaphosa clearly know we are in trouble. Whether and to what extent this is true of all cabinet ministers, party officials and senior public servants is more debatable.
Having acknowledged the crisis, which should be communicated widely to all South Africans, indicating the need for tough choices to get things under control, the next critical step is to act. And, here, the goal has to be significant fiscal consolidation.
The government has sought some consolidation in the past few years, principally through higher taxes. This has not worked, nor is it likely to: the economy is too weak to raise taxes, the SA Revenue Service needs rebuilding and tax compliance is down even as corruption is up.
The government has to tackle spending much more vigorously. In an ideal world, waste and corruption would be excised and cuts would hurt no-one but those who benefit unjustly from that spending. This is easier said than done, so a government that is serious about dealing with the crisis has to focus on big-ticket items, especially public service compensation, the growth of which has been unsustainable for at least a decade. Treasury data show that average wages in government have risen by nearly 11% a year between 2006 and 2016.
The government must maximise the savings it can obtain by squeezing waste and corruption out of the system: the more it achieves here, the less of a burden public servants will have to bear. But the country cannot afford what we already do. There is no room to increase the list.
Our situation requires a tough choice of priorities for expenditure — less on SAA, more on the National Prosecuting Authority — and ferocious determination to stick to these.
Achieving fiscal sustainability through cuts and taxes alone is probably not possible and would be exceptionally painful and disruptive. Far, far easier would be to get growth going again: if the economy had grown just one percentage point a year faster over the last decade, public sector debt could have been as low as 44% of GDP and falling rather than 63% and rising.
The fact is SA cannot solve its fiscal crisis without prioritising growth.