CARRYING cash in your back pocket comes with security risks, particularly in the South African context.     Karen Sandison African News Agency (ANA)
CARRYING cash in your back pocket comes with security risks, particularly in the South African context. Karen Sandison African News Agency (ANA)

Poor GDP numbers show its time to abandon fiscal stimulus

By Mpiyakhe Dhlamini Time of article published Jun 9, 2019

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THE LATEST GDP numbers show the economy declined by 3.2% for the first quarter of the year, after President Cyril Ramaphosa announced a R50billion stimulus package in September.

Since it followed a decade of stimulus spending instituted since the 2008 global economic crisis, we must ask whether Minister Pravin Gordhan’s decision to choose stimulus over austerity was the right one.

The dire GDP numbers also reflect Eskom’s failure to provide a reliable electricity supply. For this, we must thank the Department of Energy’s Integrated Resource Plan which didn’t provide for deregulating the energy sector.

South Africa is facing the consequences of bad government decision-making. The twin evils of government spending (which means high taxes) and regulation are harming the economy. In just the first quarter of the year, we have seen increases in liquidations, insolvencies and unemployment. Exports have decreased by 26.4% and gross fixed capital formation by 4.5% (the fifth-consecutive decline), meaning that the investments needed to set the stage for future growth are declining. It is not an exaggeration to say South Africa is de-industrialising.

The country has yet to come out of the 2009 recession. This despite the finance minister at the time, Pravin Gordhan, launching the process that would take government debt from 22.6% of GDP and bump it up to the current 55.6%. Instead of being a bulwark against the “nine wasted years”, the minister was a key enabler of the looting and economic stagnation.

Countries like Estonia that chose the harder, less popular road of fiscal austerity have recovered, are creating jobs and taking part in the Fourth Industrial Revolution instead of trying to hide behind empty rhetoric.

In 2009, Estonia experienced a decline of 14.72% in GDP and South Africa a mere 1.54%. The Estonian government cut spending, including salaries of civil servants, while South Africa increased spending, especially on civil servants. The result is that Estonia grew by 3.9% last year, its third-consecutive year of above 3% growth. South Africa grew by 0.8% last year and last experienced a 3% growth in 2011. South Africa went from 82nd in the world in 2008 to 110th in 2016 in the Economic Freedom of the World index produced by the Fraser Institute.

To make matters worse, signs of reform are nowhere to be found. The government is pursuing policies such as Expropriation Without Compensation in an environment where private sector investment is in decline.

As the president’s intervention last year shows, the “new dawn” president is just as committed to fiscal stimulus as his predecessor was. There are no signs that the government has the political will to cut spending on the civil service and state-owned enterprises.

Minister Gordhan, unlike Minister Tito Mboweni, has expressed a misguided hope that the Soviet- and apartheid-era dinosaurs, which are our SOEs, can be transformed into profitable business concerns. He did this while overruling the Eskom board and management for trying to introduce reforms, that is refusing to increase the pay of Eskom’s bloated workforce.

Those who hope President Ramaphosa can take a leaf from former UK prime minister Margaret Thatcher’s book, should remember that there’s a reason why James Callaghan and Harold Wilson failed: The Labour Party was allied to the trade unions.

It is telling that only three sectors grew this quarter. One of these is the government which added 0.2 percentage points to the GDP. The fact that the government is included in the growth numbers is an aberration. The government can grow only at the expense of every other part of the economy. This is because it grows only when it taxes our productive endeavours. It doesn’t need to provide any value to consumers or convince them not to buy from any other entity. If the government is a sector of the economy, it is one that grows at the point of a gun, benefiting from behaviour that is illegal if done by anyone else.

To further illustrate the de-industrialisation point, manufacturing was the biggest contributor to the drop in GDP at -1.1 percentage points. The insecurity of energy supply is just one of the problems our government has saddled us with by moving at a snail’s pace (if at all) towards allowing the private sector to pick up Eskom’s slack.

Most of our problems have been inflicted on us by the government, especially the decision to abandon president Thabo Mbeki and minister Trevor Manuel’s fiscal prudence. South Africans will continue to suffer as long as the private sector is demonised and not allowed to do what it does best.

* Mpiyakhe Dhlamini is a data science researcher at the Free Market Foundation

** The views expressed herein are not necessarily those of Independent Media.

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