By Lehlohonolo Lehana.
Busi Mavuso, CEO of Business Leadership South Africa (BLSA), says that South Africa has little choice but to constrain government spending.
Mavuso in her weekly newsletter, warns that South Africa must cut back on spending or induce a financial crisis.
“I am not sure if this reality has dawned on government outside of National Treasury. There are only two choices: cut back spending or induce a financial crisis. I say this so boldly because it needs to be said.”
Mavuso says dangerous narratives are promoted with the idea that spending must remain high because somehow it will deliver both social spending and growth. “It will not, and every day when I talk to business people, I can understand why.”
A state tipping into insolvency is a disaster, she says. From Argentina and Greece to Zimbabwe, it inevitably involves massive disruption to public services, retrenchment of much of the public sector workforce and the collapse in value of government debt that triggers a crisis in the private sector which is the biggest lender to government.
“Investors are always forward-looking. They want to understand the returns they will earn and the risks to those returns. State collapse is a serious risk and the less stable government’s finances are, the more investors have to price for the risk that the government could default.
“This affects the whole economy because state collapse inevitably triggers a major recession and therefore, the riskier government’s finances look, the less the private sector will invest. That means economic growth falls.”
Mavuso points out that if the contrary narrative, that state spending drives economic activity and supports growth, was true the past several years of massive government deficits would have spurred much economic growth.
“Instead, we have had 10 years of declining gross domestic product (GDP) per capita. The problem has never been a lack of state spending. It has been the structure of the economy, failing public enterprises, and crime and corruption.”
She says state spending financed out of debt also hits the economy in another way: it sucks money out of the private sector. If government is leaning on the financial system to buy its bonds, that financial system is then not lending to companies and people to spend and invest.
Mavuso also tackles the issue of social security in government spending. “Improved social security would be a good thing but it cannot be done at the cost of a financial crisis, which would instantly remove the social safety net even as it is.”
Increases in social spending were successful in the past, such as in the mid-2000s when government finances were strong and spending could be increased dramatically without risking the financial health of the state. “Growth creates the opportunity for social spending, not the other way around.”
When Covid hit, Mavuso says, we immediately knew there were serious risks to government finances. “We lost our investment grade credit rating at the start of the crisis. Public finances were already precarious given the ruining of the state-owned enterprises during the state capture years.”
However, she says, the country received an unexpected reprieve in the form of booming commodity prices during the crisis when, despite the sharp downturn in economic activity during the lockdowns, government coffers were filled by a tax on the production and sale of platinum and many other exports.
Minister of finance Enoch Godongwana has said that government does not intend to cut spending on infrastructure and social services, but that some infrastructure spending will be paused in the short term. “Of course, infrastructure spending is vital to growth, but protecting government finances is even more vital. National Treasury has been right to hold the line and business confidence is better for it.”
Public Works and Infrastructure Minister Sihle Zikalala says that Treasury’s proposal to cut his department would create more work for other departments and lead to job losses.
“Most departments have primary mandates, and it’s not just about managing the building you are in. The police, for example, need to work on protecting citizens, dealing with crime and ensuring that criminals are successfully prosecuted,” Zikalala told the Sunday Times.
“If you say they must now look after their own properties, you will be adding a responsibility. So there must be a discussion on that. I am not saying we must not, but one thing that public works should own up to is that it has not optimised its capacity.”
“Public works must optimise on the infrastructure that we have. That’s why we are saying let’s run the programmes that are going to help the government going forward, even to generate income.”
Zikalala added that the private sector can either use or buy government buildings to generate income.
He said that scaling down programmes, such as the Expanded Public Works Programme (EPWP), to fund the R350 Social Relief and Distress (SRD) grant – which Treasury has actually called to cut in its entirety – will result in job losses.
“Therefore, it is important that we structure the EPWP in a way that is massive and makes an impact. I think there must be a focus on economic growth and protecting those projects and programmes that are creating job opportunities,” the minister said.
His comments echo the ANC’s strong opposition to the cuts, with many questioning how the party can cut spending ahead of a national election. Unions have also threatened to strike if the cuts go ahead.
Duma Gqubule from the Centre for Economic Development and Transformation said that Treasury’s cuts will prove counterproductive.
Gqubule noted that cutting spending will hurt GDP growth as the government, including state-owned enterprises, accounts for 40% of GDP.
“If you cut (spending) so deeply, it reduces GDP, it reduces the tax revenue, and it results in a higher debt ratio,” he said.
“A national budget does not work like a household budget. If you and I cut spending, we save. For the government, it’s almost like a self-defeating purpose.”
He also questioned Treasury’s opposition to the SRD Grant, which only makes up R35 billion of the government’s R2.2 trillion in spending – roughly 1.5%.
He argued that Treasury is using scare tactics by suggesting that the program, which assists 8 million people, can be terminated shortly before an election.
There have also been concerns over the constitutionality of a new “financial law” that will introduce compulsory austerity measures if the country hits a specific debt size without consultation with the government or social society.