Political chaos as fiscal policy
It is a sign of the times that after the tabling of the 2024-25 budget by Finance Minister Enoch Godongwana a news headline said he had inflicted pain on taxpayers. This is an election year.
Godongwana had no choice, and neither does the country. Instead of dishing out election year goodies, he issued a stern warning that South Africa is paying too much to service its trillions of rand in sovereign debt.
“Debt-service costs will absorb more than 20% of revenue. To put this into perspective, spending on debt-service costs is greater than the respective budgets of social protection, health, or peace and security,” he said.
He also lamented an almost stagnant economy, saying that annual GDP growth for 2023 is expected to be 0.8%.
At 32%, unemployment remains high and when those who have given up looking for work are accounted for, it rises to nearly 44%. Half of those without work are under the age of 35. This has been the case for years, raising the prospect of about half the population reaching the age of 50 without the industrial and other experience needed to drive economic productivity and efficiency.
South Africa’s economic problems are too many and too deep to set out in full, suffice to say that it will take many years of trying before the country reaches the levels of growth last seen in the early 2000s. There are too many binding constraints that fall outside the realm of fiscal policy, but nonetheless affect it greatly.
Although South African fiscal policy discourse tends to centre on the minister, the lesson from the past two decades is that it is the politics and the quality of leadership that set the scene for fiscal policy choices. In our case the wheels started falling off the wagon as early as 2004.
This was the year in which a slew of laws and institutions designed to fortify democratic accountability began to bite, and ANC comrades decided they did not like what they had done. These include the formation of the Scorpions, public and municipal finance management laws, anti-corruption laws, the National Prosecuting Authority, the South African Revenue Service and other similar institutions.
The arrest and indictment of prominent politicians, or being forced to pay their taxes on ill-gotten gains, led to accusations that state institutions were being weaponised against political opponents in the ANC. This feeling was given impetus by the successful prosecution of Schabir Shaik, Jacob Zuma’s alleged financial adviser, for bribing him.
Zuma’s sense of grievance provided an opportunity to both the corrupt and those who felt ideologically alienated and marginalised from the party’s economic policy thinking. For example, Zwelinzima Vavi, labour federation Cosatu’s general secretary at the time, believed the government should have run wider fiscal deficits to invest in the economy, while Thabo Mbeki’s ANC wanted to reduce sovereign debt and build capacity for countercyclical stimulus during rainy days.
Mbeki lost the ANC presidency in 2007, just as the global financial crisis was beginning to take off. By the time it hit boiling point in September 2008, the new ANC leadership under Zuma had only one thing in mind, and that was Mbeki’s removal from office, which took place in 2008 at the height of the financial crisis.
But the most consequential fiscal policy decision was to come at the beginning of 2009, when the government announced a R787 billion infrastructure investment programme over five years. This was meant to stimulate the economy, using a combination of tax revenue, which was rising, and the wide borrowing room provided by low sovereign debt.
It was this investment that set off a frenzy of looting and political infighting over the next decade, including the handing over of the reins of government to the Gupta family. The post-Mbeki period also saw the destruction of key institutions that had taken years to build.
The R787 billion was supposed to build power stations and related infrastructure, new dams, maintain roads, buy locomotives for Transnet and trains for the Passenger Rail Agency of South Africa (Prasa), among others. It was exactly around these initiatives that the most egregious corruption took place.
In short, the borrowings went to waste because we still have load-shedding, and it’s worse. Transnet still does not have the locomotives it bought because the transactions were corrupt. Prasa bought initially unusable trains from Spain while pretending they were designed and manufactured in South Africa.
Municipalities were no different either, joining in their own frenzy of stealing, maladministration and dysfunction. For years now, the auditor general has raised alarm over most municipalities because of poor financial management and corruption.
The end result has been a dire fiscal score that has resulted in an even more precarious economic and fiscal position than the Zuma alliance complained about in 2009. The scoreboard looks truly dire, headed to apocalyptic.
Unemployment is higher now at 32% than it was in 2007, when it was just over 21%. Instead of falling, we began to see a new trend of graduates who are unemployed, and populist decisions to exclude work-seekers under the age of 35 in low-level public sector employment.
Eskom built a debt pile exceeding R450 billion, and the country’s own debt is now nearly 70% of GDP, up from less than 30% in 2007. Debt service costs are now the fastest-growing expenditure item in our budget, the second-biggest by quantum, at R356 billion and ticking up each year.
The debt taken up by Eskom and Transnet is mostly government guaranteed, which makes the government’s own borrowing more expensive. So today, unlike 2009, the government borrows not to invest in the economy but to pay its debts.
Current discourse about fiscal policy tends to ignore the fundamental question of who manages government finances. Those who argue for a large fiscal stimulus now ignore what happens under the current government when so much money is deployed into the system. It gets stolen and wasted. This occurs to the extent that if significant, highly risky and expensive borrowing were to be done now, it would be suicidal. There is nearly zero chance that history would not repeat itself, sending South Africa to the same place Zimbabwe now finds itself, a basket case despite enormous riches.
Yet, restructuring of the sovereign balance sheet is needed urgently so that debt service costs can drop, creating room for more borrowing at affordable rates to invest in people and the economy. Ultimately it is not the quantum of the borrowing that matters, but whether that borrowing produces enough economic growth to always be a manageable percentage of GDP.
The borrowing has resulted in the opposite outcomes — economic stagnation, high unemployment, political dysfunction and serious weaknesses in key institutions. That produces the high and increasing debt to GDP ratios we see now.
That initiative will not bear fruit if we do not show progress in the fight against corruption, place competent ministers and public servants in critical positions and have leaders who understand that borrowing is always against future generations. With an election on 29 May, South Africans will, wittingly or otherwise, decide on who they trust with their money.
Songezo Zibi is the national leader of Rise Mzansi.