The state is delusional and dishonest about SA’s economic growth
The Treasury’s plan for faster economic growth is idiotic; no businessperson believes that fiddling at the edges will solve SA’s primary problems
Everyone seems to agree that avoiding a severe fiscal crisis will be impossible without faster economic growth. Currently 78.7% of the government’s primary borrowing requirement is used to pay interest on previous borrowings. Within 10 years, the overall government debt-to-GDP ratio will be 80.9%. To reverse course, private-sector economic growth needs to average a highly improbable 5.3% per annum for at least a decade.
The government has no idea where economic growth originates. In its recent medium-term budget policy statement (MTBPS), the Treasury pointed out that economic growth has fallen in almost every fiscal year between 2007 (5.9% per annum) and 2019 (0.5% per annum). Yet, even as growth has dwindled, the Treasury has forecast an abrupt resumption and lasting acceleration of economic growth in every budget over the period.
Growth, in other words, has been taken for granted: it is simply assumed to be the natural, inevitable state of things. A headline in the medium-term budget — “The growth puzzle: why so weak for so long?” — and a rambling wish-list mostly linked to additional government spending are telling.
Economic growth is not inevitable. At its heart, growth is causally related to business profitability. If the goal of a market economy is to maximise consumer well-being, businesses’ pursuit of profit is the means of achieving it. If businesses experience declining profitability, business expansion and all the positive things that go with it — investment, employment, innovation, competition, taxes and the like — will decline as well.
It is therefore alarming that corporate profitability is currently the lowest in nearly 25 years. Last year, companies — both publicly traded and privately held companies, excluding state-owned enterprises (SOEs) and non-corporate entities, such as partnerships and sole proprietorships — generated an after-tax return on assets of 13.5%, which is significantly below the peak of 17.9% reached in 2004. The economy’s operating surplus in 2019 will only be known next year, but it is likely that business profitability will drop below 10% for the first time in 30 years.
The Treasury was once a lone voice for reason and restraint, but it has joined the choir and permitted the greatest uncontrolled expansion of government debt in SA history
The Treasury’s plan for faster economic growth is idiotic. No businessperson I know believes that fiddling at the edges through spending on railway lines, breaking up large businesses, reducing airline ticket prices and greater regulation of mobile telephony costs will solve the country’s primary problems.
In its report, the Treasury pays lip service to the World Economic Forum’s (WEF) well-established link between competitiveness and economic growth, but it conveniently fails to mention that, according to the WEF, the government is directly responsible for every one of the economy’s 10 least competitive features (in order: corruption, crime, political instability, high tax rates, government bureaucracy, poor work ethic, restrictive labour laws, poor education, inflation and cumbersome credit rules).
We have long known that the government is delusional about its capabilities. It is altogether new that Treasury has become dishonest about the government’s intentions, as several examples illustrate.
Firstly, public-sector health outcomes are unspeakably bad, yet in its statement, the Treasury indicates that the government will press on with the multi-trillion-rand National Health Insurance (NHI) scheme, which is now widely understood to have the intermediate goal of commandeering the surpluses of private medical schemes and the ultimate goal of greatly expanding the public-sector workforce.
Secondly, the Treasury implies that Eskom bailouts are a primary reason for the government’s fiscal recklessness over the past decade, yet 76.7% of the increase in the government debt-to-income ratio, vis-à-vis the Treasury’s February 2019 baseline, has nothing to do with Eskom.
Thirdly, the Treasury states in its report that employee compensation accounts for 34.0% of government spending when it knows full well that this incredibly low figure is only achieved by incorrectly loading the denominator, government spending, with all manner of questionable figures. In fact, employee compensation accounts for 88.1% of the government’s internal spending (that is, excluding outside purchases).
The Treasury was once a lone voice for reason and restraint, but it has joined the choir and permitted the greatest uncontrolled expansion of government debt in SA history.
It is obvious that the ANC is delusional. It is less obvious that the DA has been affected by folie à deux. The DA has largely scrubbed the term “privatisation” from its lexicon, despite its urgent and unambiguous need. The DA does not have workable alternatives to the government’s economic policies, despite Treasury’s fiscal policy having clearly failed and the SA Reserve Bank’s monetary policy being in the process of failing. But the DA continues to possess one thing the ANC sorely lacks: accountability.
Recent departures offer hope that the DA will re-emerge as more than a local and provincial party. In the longest economic downturn since records began, re-emergence will be impossible without a plan for the economy. The WEF’s 10 most problematic factors for doing business in SA would be a good place to start.
• Sharp is a director at Prophet Analytics.