Trimming state fat and cutting investor red tape two ways to rescue SA
The upcoming budget will be a tough balancing act as the country faces high debt levels and low growth
This year’s national budget takes on critical importance. Public sector debt has more than doubled over the past 10 years, leaving very little fiscal room to manoeuvre; Eskom is operationally and financially in crisis and will need public funds and significant restructuring to survive; an election is looming; spending demands are rising; new tax options have largely been exhausted; and economic growth is disappointingly weak.
Meanwhile, ratings agencies are again lurking and bond investors growing more sceptical.
The fiscal arithmetic is not encouraging. To start reducing debt and therefore the interest bill, the government must either run a primary surplus, where noninterest spending is covered by revenue collections, or real economic growth must exceed the real interest rate paid by the fiscus. The first option — reducing spending — has been complicated by the legacy of past excesses and ineffective delivery.
In the first three years of Jacob Zuma’s presidency, the public sector wage bill exploded by an extraordinary 28% in inflation-adjusted terms as wage settlements greatly exceeded inflation and the number of employed grew. This was a period when union influence on the new administration was strong given their king-making status at Polokwane.
Part of the excuse for this splurge was the need for fiscal stimulus to get the country out of recession in 2009. However, the boost was meant to be temporary and therefore come from infrastructure spending, which is nonrecurring and reversible. Instead capital spending was relatively restrained and, as demonstrated clearly by the current Eskom blackouts, very ineffectual.
Certain public procurement practices are another failure that has inflated spending in the public sector and must be tackled urgently. Again, Eskom is a demonstration of good intentions gone wrong. From unreliable, expensive and poor-quality coal to bad design and execution at Medupi and Kusile to reports of dentists and beauticians supplying the utility with diesel at no doubt substantial mark-ups, the net result has been intermittent and expensive electricity with huge costs to the economy in terms of growth and unemployment. After more than 10 years of huge capital spending, a 170% real increase in the price of electricity and a workforce that has grown by more than 50%, Eskom produced less electricity in 2018 than it did in 2004.
But while Eskom is not alone, however; it is rather symptomatic of what is happening in the country at large. The many examples include the Bosasa revelations, expensive jet fuel from middlemen pushing up costs and losses at SAA and SA Express and, more recently, 14 toilets supplied to Ditshipeng Primary School at a cost of R4.7m.
Preferential procurement is a necessary tool for transformation but cannot be executed at any cost. A rethink on how to execute such policies to obtain maximum benefit for the greatest number while keeping the state solvent is urgently needed.
Reduced expenditure options may be limited in the short term because of entrenched interests, but proper reform could reduce deficits materially in the medium term without any loss of service delivery or, more probably, with improvements. It is also important not to make further expensive spending mistakes. Projects such as the proposed national health insurance need to be properly costed and assessed before the go-ahead is given.
The other means to achieve a primary surplus would be to increase taxes. However, the scope here is very limited. Weak employment and economic growth mean household disposable incomes and company profits have been squeezed. The government may instinctively want to impose more tax on the wealthy, but this would be more symbolic than revenue-rich. Tax revenues will ultimately be determined by improved tax administration, broadening the tax net and, of course, by better economic growth.
Better economic growth is also the key to the rest of the fiscal equation. Some level of fiscal expansion would again be possible without rising debt, provided real growth exceeds real interest rates. To put this in perspective, we have calculated that SA lost about R470bn of GDP stemming from the corruption, maladministration and misguided policies of the second Zuma administration starting in 2014. This was done by examining the economic performance of similarly structured economies over the period and by assessing actual performance against estimated potential.
This not only means there was lost tax revenue of R140bn, but it also would have reduced the deficit in fiscal 2019 to about 2.4% of GDP, compared with the estimated 4% reported in the October budget statement. Government debt would now have been less than 49% of GDP versus 56%, about R250bn lower. If the government had this extra latitude Eskom’s debt overhang could more easily have been tackled.
What then needs to be done to unlock economic growth? Clearly a Keynesian demand-style stimulus and so-called state-led development are not the solutions as this would just be a repeat of what has already happened since 2009, with startlingly bad results in both relative and absolute terms. Instead, business and investment need to be attracted — not through special incentives, promises and exhortations but the reduction of costs by unpeeling the layers of regulatory burden and requirements that have built up, especially over the last decade.
Some experimentation may be required, such as establishing job-creation zones where new export-orientated business activity (that does not compete with existing local enterprises) is created by allowing investors to just pay taxes and employ the unemployed, with no further requirements and a minimum of regulation.
To deal with impediments stopping existing businesses from investing and creating jobs, a proper economic impact assessment of the effects of existing and new policies and regulations needs to be carried out. A good start would be to re-examine the conclusions of the high-level panel report as well as the National Development Plan. The aim would be to give sufficient weight to the economic impact assessments that would prevent damaging legislation from going ahead, such as the recent signing of the Competition Amendment Act, which gives the government far too much discretion and therefore creates more arbitrary risk for business.
President Cyril Ramaphosa indicated in his state of the nation address that “above everything else, we must get our economy working again”. There is no better way of doing this than by dealing witth the risk-reward equation for existing and new business.
• Dykes is Nedbank chief economist.