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SA’s finances are in bad shape and time is running out to fix them

South Africa’s public finances are in a perilous state. there are  four main reasons for this. First, economic  growth

is low or non-existent. Second, tax revenue collection is  repeatedly below forecasts. third,  debt levels have risen rapidly and are now at their highest levels in the post-apart- heid era. Fourth, the  poor perfor- mance of state-owned enterprises is necessitating large-scale government support.

recent  developments  since the tabling of the 2019/20  budget in February 2019  have only made the

situation worse. A  downgrade of government debt to ‘junk’ by a third ratings agency will lead to an out- flow of investment  and exacerbate matters  further. South  Africa  is, in fact, fortunate that this has not already happened.

the state of South Africa’s pub- lic finances is the outcome of differ- ent dynamics  in three, overlapping periods. the   first  was the  period after the 2008 global financial crisis. the  second was the period under the continued presidency  of Jacob Zuma. And the third has been the period since Zuma was succeeded by cyril ramaphosa. careful consid- eration of these periods contradict widely-circulated claims in the polit- ical space.

Some have claimed that South Africa’s  woes began with Zuma but this is not true. the  first shock to

the economy under public financ- es  was the  global financial crisis. others  have claimed that Zuma is not responsible  for poor economic and public finance performance, but this is also not true. South African economic performance  should have been able to recover to a much great- er degree than it did under the era of his leadership.  Government  rev- enue collection seems to have been negatively affected by  institutional destabilisation of the South African revenue Service.

Finally, the  deterioration of economic indicators (growth and employment), along  with  further underperformance   of  revenue col- lection and  public finances more broadly, is  being laid at  the door of ramaphosa’s presidency. that is simply implausible.

the   deterioration  can   often be  linked to  factors that  preced- ed  ramaphosa’s   replacement of Zuma in  early  2018.   Admittedly, ramaphosa has not helped his case by making promises about job cre- ation, for instance, that may be out- side the ability of the state to deliver.

Understanding why such claims are likely to  be  wrong is  import- ant not just because of attributing blame, but in order to understand what the  fundamental drivers are behind the country’s current state and future trajectory.

Recycled disagreements Unfortunately, beyond blame, much of the policy discussion is charac- terised by  recycled disagreements. these  date to the era in which the African National congress   (ANc) government adopted the  Growth, employment    and   redistribution (GeAr)    strategy  –   which  was opposed and resented by left-wing parts  of  the  ANc   alliance. that strategy was largely concerned with reducing the  debt  levels the  new democratic government inherited from its apartheid predecessors.

For example, left-wing commen- tators have argued for expansionary fiscal policy. this  basically means increasing  government spending to  a  significant degree. they  have also claimed that National treasury implemented ‘austerity’  after 2008. this   is   incoherent. First,  South Africa actually adopted a ‘countercy- clical’ approach after 2008:  govern- ment spending increased faster than revenue. that  is how the country’s debt initially escalated.

Second, increasing government expenditure in the manner proposed is, at best, a very high-risk  strategy. With the country’s public finances already under strain,  an  increase

in expenditure that does not deliv- er significant  increases in econom- ic  growth and  tax  collection will lead to a dramatic deterioration in public finances. that   could cause harm for generations to come. these risks, which seem more likely than the  benefits, are  never mentioned by populists who simply regurgitate arguments from earlier eras.

the  reality is that even though treasury attempted to maintain gov- ernment spending to  support the economy during the  aftermath of the global financial crisis, and then attempted to  stabilise debt  levels using a  policy of ‘fiscal consolida- tion’, it has been unable to do either. the  economy has  not  recovered, arguably due in significant  part to the  ravages of  state  capture and other state failures in the Zuma era. Debt  targets have been  regularly missed. At one-point national gov- ernment debt was expected to stabi- lised below 45% of GDP, now it has gone above 60% and may reach 70% of GDP within a few years.

there   is  no  consensus among

economists or other public finance

experts on a specific threshold that is tolerable. What is clear though is that the higher the amount of debt relative to the size of the economy, the greater the risk.this is especially true where economic growth is lack- lustre, as it has been in South Africa for some years.

recent developments  have only made the  situation more dire. In the 2019  budget, treasury  indicat- ed that it would have to breach its expenditure ceiling for the first time in order to give support  to national power utility eskom  amounting  to r23 billion per year for an intended

10 years. that  was despite planned cuts to public service employment and additional tax measures.

Since then, eskom  was given a lower-than expected tariff increase by the National energy  regulator (NerSA). National government has

also tabled an additional proposal to give eskom a further r59 billion over two years.

It  seems unlikely that  govern- ment will be able to cut such vast sums in  other parts of  the  state, not least at such short notice, with the result that debt targets will be exceeded again. And  despite the money being poured into  eskom, there is no clear indication of the overall plan to stabilise the utility’s finances.

Meanwhile  various other risks, like  South  African  Airways, the road  Accident Fund and medical negligence lawsuits, continue to lin- ger in  the  background. economic growth and job creation are virtually non-existent, and  both  are  below population growth. this   means a higher unemployment  rate and less national wealth per person.

In  the  face  of  the  crisis with eskom, public finances and econom- ic growth, the only way to proceed is  to  secure a  societal agreement on the way forward that recognises the need for sacrifices in the face of

the  crisis. ramaphosa  is  uniquely equipped to  secure a ‘social com- pact’ of this kind. but he is moving too slowly. this  may be due in part to incessant factional battles in the ANc and an unprecedented assault on ramaphosa and close allies like Public enterprises  Minister Pravin Gordhan that  is  being conducted through the  office  of  the  Public Protector.

the  president is  also  heavily reliant on advisers, his cabinet  and senior government officials –  few of whom have shown that they can deliver on such a weighty responsi- bility. but  as others have noted: if the country fails to agree in time, decisions will be forced upon it. And under such dire circumstances there will be less opportunity  to protect vulnerable citizens with the least to sacrifice