The Helen Suzman Foundation held its first Round Table of the year on Tuesday, 6 February 2018 at 6 Spin Street in Cape Town on the theme ‘The Budget: Growth and Debt. Speakers were the HSF’s Head of Research, Charles Simkins, the HSF’s Legal Counsellor, Anton van Dalsen, and Dr Iraj Abedian, chairman and Chief Executive of Pan African Investment and Research Services.
This report presents the content of the addresses.
Charles Simkins started off the discussion with comments on six themes:
The potential output of an economy represents the level of output that an economy can sustain without causing any changes to inflation. The potential growth rate is the rate of growth of potential output. A study published by the Reserve Bank indicates that the potential growth rate between 2010 and 2015 was in the 1.9% to 2.3% range and that it almost certainly fell during the period to less than 1.5%. The population growth rate in 2015 as estimated by the United Nations was 1.3% per annum, so that the potential growth rate in per capita income in that year was virtually zero. IMF projections indicate that real per capita GDP will not reach its 2014 level even by 2022. Of course, in the short run, actual growth may exceed potential growth, or fall below it.
Raising potential growth requires a whole string of microeconomic changes. We have not lacked for advice on these over the past fifteen years, from the Harvard South African growth project, the IMF, the World Bank and the OECD. We have taken virtually none of it. Good fiscal policy cannot substitute for structural reform as a means for raising the potential growth rate, but poor fiscal policy can damage growth.
In the contemporary South African context, it would result in:
There are:
The Treasury’s principal function is to represent the government’s budget constraint. Three political conditions are essential:
Treasury officials need to be the most technically competent in the public service. ‘Cadre deployment’ among officials is always undesirable and particularly damaging in the Treasury. The ‘developmental state’ fantasy should not weaken Treasury control.
Relief at political developments and charm will bring some economic benefits in the short run, but in themselves they will not tackle a long-standing lack of seriousness about economic growth. Whether the necessary political will to reverse the situation can be mobilised is an open question. If it can’t, only windfalls can save us from economic and social stagnation.
Oh, and one thing one can be confident about is that substantial increases in taxation are coming in the budget. The only issue is how they will be distributed across the forms of taxation. Top earners, brace yourselves. You will not be alone in the contemporary world.
Anton van Dalsen explored the current political and economic climate as a means of understanding how we got to where we are, and what we need to focus on fiscally, in order to surmount our economic growth challenges:
It’s important to consider debt expressed as a percentage of GDP. Now this sounds very dry and academic, but it is an important pointer - the benchmark danger level used by the IMF and others for developing economies is 70%.
What this says in a few words is that if your debt reaches that level, you are having to spend so much in interest payments that you have to cut essential services such as health, education etc. to be able to service the debt. In short, you are confronted with a fiscal crisis. To put it in everyday household terms, it is the situation where you are having to pay so much towards your credit card debt that you have to skimp on necessities.
In South Africa’s case, National Treasury’s own forecast last October is that the country’s debt will stand at 60% of GDP in 2020/21 (up from 50% in 2016/17) and interest payments will almost equal the national health budget at that stage. Debt at these levels run the danger of increasing quickly if there are further unexpected shocks.It’s important to note that excluded from the debt to GDP ratio I mentioned earlier, are the state’s guarantees for the debt of state-owned entities - these are seen as contingent, and not actual, liabilities. Most important of these by far is Eskom’s guaranteed debt of R350 billion, together with a further R200 billion in respect of independent power producers - which is effectively, Eskom exposure, since Eskom has to buy their electricity. So Government has effectively guaranteed R550bn of Eskom exposure - to give you an idea of the numbers, this total of R550bn amounts to just over 20% of total already existing government debt. (Or: 12% of GDP)
And the real danger lurking here is not that Eskom will default on it all (which is very unlikely), but that one lender calls default and brings the whole house tumbling down - since all lending agreements are subject to cross-default provisions and one lender calling default therefore entitles all other lenders to do the same.
Iraj Abedian spoke to four themes in his address:
Our fiscal revenue is low and our GDP growth is stalling, however inefficiencies created during the Zuma era can be corrected. It requires putting the right people in government. The erosion of the fiscal base is not accidental, and the private sector via corporates, have been complicit.
Should we have the cabinet that we have? What is the “cost to company” of each Minister in South African? Public expenditure is driven by sum total of ethics of governance. The unchallenged use of the public purse is lamentable when it does not conform to the Ministerial Handbook, for the members of the Cabinet or executives at sub-national levels. Such expenditure is not constitutionally given or ethically neutral. What else could have been done with this money?
South Africa needs microeconomic changes to improve growth – it is not for a lack of advice. Over the past decade, government has been unwilling to heed advice on such changes.
A revival of growth will mean that cabinet needs to be taken outside of its comfort zone.
The country requires an “ethics audit”, where as much as 40% of public expenditure needs to be revised, refocused, and directed to the needs of the society. We shouldn’t take revenue figures as a given without interrogating the true breakdown of costs. Expenditure morality and tax morality are the two sides of the same coin.
This includes the role of corporates who in some instances are as bad as certain politicians
The Zuma era meant 8 years of looting and a consistent erosion of the tax base. The financial and fiscal control that took 12 years to build and which was destroyed in his presidency as a result, must be rebuilt. This rebuilding must happen at all levels of the state machinery – including supply chains, authorisation and tendering process. The management problem facing government exists at all levels - national, provincial, local, and also within state-owned enterprises. Fixing these deficiencies will have a feedback effect into addressing the macro issues. This means the more we manage public expenditure with probity, the more the economy responds positively and generates revenue for the state.
Even if our growth trajectory manages to stay on track, we still require a cultural shift in how fiscal management operates in order to remedy operational inefficiencies. The challenge is figuring out how to get efficiencies from limited resources
To undo the damage of the Zuma era will require strategic fiscal decisions around sustainable growth. In order for this growth to be sustainable, in the 21st Century, we should all be able to share in it. We need:
South Africa’s sustainable growth prospects are positive but the road ahead will require keen scrutiny of the relationship between the public and private sector, a focus on rejuvenating the culture, morals and ethics of management, investment in the social needs of society and a return to rebuilding what was lost under the Zuma era. Much of this, in his view, is a matter of planning, strategic decision making, and recommitment to shared values.
Kimera Chetty
Researcher
kimera@hsf.org.za