THERE is particular concern among investors about the financial crisis being experienced by Eskom and other state-owned enterprises. As the government continues to bail them out, the mountain of debt continues to grow, says the writer.     Supplied
THERE is particular concern among investors about the financial crisis being experienced by Eskom and other state-owned enterprises. As the government continues to bail them out, the mountain of debt continues to grow, says the writer. Supplied

‘We’ll all pay the price for past fiscal recklessness’

By Professor Andre Roux Time of article published Feb 25, 2020

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If the Finance Minister Tito Mboweni gets his way, we can expect him to table a necessarily restrictive - and therefore largely unpopular - Budget tomorrow.

At the same time, it would be politically untenable to turn a blind eye to the predicament facing millions of South Africans: poverty, unemployment and disillusionment. The notion of reducing government outlays on, for instance, education, social grants, and health care, is, in the circumstances, ludicrous.

When all is said and done, the minister’s budget speech will probably come in for a great deal of criticism from both friend and foe.

The simple Budget arithmetic and the underlying conditions and unrealistic expectations are incompatible with one another. Things will first have to get worse for a while before they get better. But if the right strategic decisions are made with conviction and clarity of purpose and intent, 2020 might be the year in which the seeds of a moderate recovery are planted. We should not allow our judgment of the country’s longer-term future to be entirely clouded by day-to-day failures and indiscretions.

In addition to the external forces, over which we have no control, the Finance Minister has to contend with a number of obstacles - often self-imposed - to growth and development.

Deficit nation

Underpinning the constraints in the economy is the fact that South Africa has become a deficit nation.

Government expenditure exceeds government revenue; imports of goods and services exceed exports of goods and services; household consumption expenditure exceeds household disposable income; and the demand for investment goods exceeds the availability of domestic savings. In short, gross domestic expenditure (GDE; aggregate demand) has been higher than gross domestic product (GDP; total output) for a number of years. As a consequence:

* The household debt-to-disposable income ratio has been between 75 and 80 percent since 2007, compared with a long-term average of between 50 and 60percent in the previous few decades.

* Government debt is rushing towards 60 percent and beyond of GDP. It was 28 percent in 2008.

* The ratio of foreign debt-to-GDP is 47 percent, compared with 19 percent in 2005.

* Fixed investment spending in 2018 exceeded gross domestic savings by almost 4 percent of GDP (in 2002, savings exceeded investment by a factor of 2 percent of GDP).

The implication of the growing indebtedness of SA Inc is that the country lives in perpetual hope that its various deficits will be financed by non-residents, at an affordable cost.

Until a decade ago this outcome was generally achieved, as foreign savers found the country to be sufficiently attractive to warrant a meaningful investment in shares, bonds, plant, equipment and other forms of direct investment.

But this might have been not so much a vote of confidence in South Africa, but a motion of no confidence in the short-term economic outlook then prevailing in the US, Western Europe and Japan. Today, investors are probably finding it more difficult to formulate good reasons for financing South Africa’s fiscal, household, foreign and savings deficits.

On reflection, because of this, South Africa’s relatively robust economic growth performance during the first few years of the 2000s was largely driven by consumer and investment spending, which, in turn, was accommodated by rapidly expanding debt.

The latter are not sustainable. In fact, the past few years have seen a modest decline in the share of household debt to disposable income as households attempt to restore the integrity of their balance sheets. This has moderated the growth in consumer spending.

The government, however, has yet to follow suit. It is now in “injury time”; there are no more second chances. Although Moody’s has to date elected to retain South Africa’s sovereign debt investment status, the risks of a downgrade to junk bond status are real.

There is particular concern among investors about the financial crisis being experienced by Eskom and other state-owned enterprises. As the government continues to bail them out, the mountain of debt continues to grow.

Debt must be curbed

This year’s budget must show a serious and plausible intent to, at the very minimum, curb the accumulation of debt. This requires a marked narrowing of the budget deficit by restraining the growth in government spending and/or raising tax revenue. The former will compromise the well-being of the poorer members of society.

Given the low economic growth expectations, the chances of organic growth in tax revenue are slim; this means that the government will be able to generate higher revenue only through (upward) adjustments to tax rates. The usual increase in “sin tax” rates will not be sufficient.

The most efficient mechanism would be another one percentage point increase in the rate of value-added tax, which could yield an additional R20bn. This idea will be met with insurmountable political resistance, even though the burden on the poor could be relieved by, for instance, raising social grants and/or expanding the range of essential goods that are taxed at 0percent.

Failing this, the brunt of the higher tax burden is bound to fall on the private sector - specifically through a lifting of the maximum marginal rates of tax on personal income and, possibly, the introduction of a “wealth tax”. Higher corporate tax rates might also be considered.

Normally, one would expect a government to adopt a stimulatory fiscal stance during times of economic stagnation. Now, however, if anything, an austerity approach is called for, with consumers, the business sector, workers and the unemployed paying the price for past fiscal recklessness.

Meanwhile, for President Cyril Ramaphosa the honeymoon period has exceeded its sell-by date - 2020 is the year for him to show his mettle in dealing firmly and decisively with the legacy of the previous leadership.

Professor Andre Roux is an economist at the University of Stellenbosch Business School.

PERSONAL FINANCE 

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