Prioritising growth is the only way to get out of our debt swamp

Ann BernsteinSeptember 2nd, 2019Latest News, News and opinion, Op-ed

SA is in a profound and deepening economic crisis.

The country’s public finances are increasingly precarious, its macroeconomic fundamentals increasingly unsound and its path increasingly unsustainable.

Unless SA deals with its fiscal crisis, growth will not accelerate. However, it is true also that unless SA gets growth going, it will not resolve its fiscal crisis.

The 2019 budget estimated that in the financial years from 2015/2016 to 2021/2022, the government and major state-owned companies (SOCs) would borrow almost R2.2-trillion. This implies that if everything went to plan, the government would borrow R1bn a day, every day, for seven years. But even before the ink was dry, that number became an underestimate when the latest bailout of Eskom added nearly R60bn to it.

The effect on government spending of all this is dramatic: debt-service costs are the fastest-growing item on the national budget, and now consume almost as much as the budget for health, and twice the budget of the police.

Simply put, the reason the public sector has been borrowing so much is that since the 2009 recession, government spending has far exceeded its income. State spending plans have been premised on assumptions about economic growth and tax collection that have proved to be consistently overly optimistic, with the government slow to adjust expenditure in the face of declining growth. The result is large, persistent deficits, leading to vast borrowings.

Borrowing money — even enormous amounts of money — is not a problem if the money is used to create assets that drive growth and increase the economy’s capacity to repay the debts incurred. This, however, is not the SA experience: state capture, widespread corruption, poor governance, incapable leadership and procurement policies ill-designed to maximise efficiency have all meant that much, even most, of the borrowed money has been wasted.

We have spent hundreds of millions of rand on power stations that do not produce power and scores of billions on trains that never arrive: despite the billions allocated to Prasa’s modernisation, declining service means commuter trains carry 40% fewer passengers today than they did a decade ago.

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.

Tackling the crisis in our public finances with determination will send a powerful signal about the government’s seriousness. Simultaneously, the government must put Eskom and other SOEs on a new path: some must be sold, some must be restructured, many need new leadership that has institutional and political independence in order to make the tough choices required.

Additionally, the government — which has long talked about its desire for growth — needs to walk the hard yards and deliver growth-friendly reforms that everyone knows we need: open the country to skilled immigration, reform labour market rules to encourage a more labour-intensive economy, embrace a new attitude to markets and business, address the regulatory burden, make it easier to employ young people and start new firms.

Finance minister Tito Mboweni has said “we really cannot go on like this”. And as economists like to say: things that can’t go on forever, don’t.

How SA’s unsustainable trajectory ends is uncertain. What is certain is that as we drift deeper into the swamp, we are all paying the costs, and the poor most of all. Time is running out. Courageous leadership is essential if we are to make the decisions the country desperately needs.

• Bernstein is executive director of the Centre for Development and Enterprise.

Read the article on Business Day