John Endres
South Africa is barrelling headlong towards a debt crisis: the government is rapidly approaching a situation where it will be unable to repay its debt, a result of having spent more money than it collected through tax revenue over a period of several years.
This year, the government is planning to spend R1.8 trillion, while collecting only R1.1 trillion in revenue. The shortfall of R700 billion has to be made up by borrowing at a rate of about R2 billion per day – the equivalent of an SAA bailout every five days.
This process of getting deeper into debt is self-reinforcing. As the debt piles up, so does the interest, making it harder and harder to repay the principal amount. Worse still, as doubts about the government’s ability to repay its debt increase, lenders demand higher and higher interest rates to compensate for the perceived risk. So the debt becomes not only larger, but also more expensive.
The responsible thing for a government to do in this situation is to close the gap between income and expenditure by spending less and collecting more.
However, on the expenditure side, the South African government cannot cut back on social grants or debt servicing, and it (correctly) does not want to cut back on infrastructure spending. That leaves the public wage bill as a source of savings, which the government is tentatively trying to tap into, but probably does not have the will to pull off in the face of fierce opposition from the trade unions.
A further source of potential savings is to reduce seepage by combatting corruption as well as wasteful and fruitless expenditure. But here, too, the signs are not encouraging. The ANC government has no appetite to tamper with its patronage networks and appears incapable of getting wasteful expenditure under control, judging by the Auditor General’s consistently disheartening reports over the years.
On the income side, the government can try to tax people more heavily through stricter enforcement, new types of taxes and higher tax rates. But collecting more revenue in this way is challenging because most taxpayers are already feeling the financial squeeze after years of economic decline. They are also disinclined to financially support a government that misappropriates their contributions and allows corrupt cadres to steal them with impunity.
Finally, a further option for the government – and this may in fact be the easiest, despite perceptions to the contrary – is to grow the economy. A larger economy can contribute more taxes, and the better economic management that underpins it would give lenders greater confidence that their loans will be repaid.
However, the government’s economic reconstruction and recovery plan does not inspire confidence that it will lead to higher growth. Judging by the government’s past performance, the centrepiece of the plan, a massive infrastructure spending proposal, will primarily result in massive corruption and wastage, and precious little working infrastructure. The same can be said for its plans for state-led job creation. Growth will remain elusive.
The main problem with the government’s plans is that they place far too much reliance on the state’s ability to deliver, when recent years have made it painfully clear that what we have is an incapable state that uses its powers to hobble a highly competent private sector.
Various pieces of legislation in the offing will exacerbate the situation. They include plans to nationalise the entire health sector, ratchet up race-based hiring prescriptions, nationalise the central bank, tap into private savings by forcing pension fund managers to bankroll state infrastructure projects, and a push to change the Constitution to enable the state to expropriate property without compensation.
None of these initiatives will lead to the growth that the country so badly needs. Together, they paint a picture of a hostile investment environment in which private companies are viewed with suspicion, strangled with regulation, and expected to accept that their property may be subject to seizure by the state. The fact that numerous Bilateral Investment Treaties between South Africa and its main trading partners were cancelled in recent years – with the assurance that foreign investments would enjoy the same protections as local investments, under the very local law that is now about to be amended – will further unsettle investors.
If South Africa is to avoid a debt crisis, it must get its economy to grow. And for that to happen, investors must be presented with a hospitable environment in which the government will not abuse its powers to replenish its empty, leaking coffers. Expropriation without compensation must be taken off the table and property rights must be assured – anything less is entirely incompatible with growth.
John Endres is Chief of Staff at the Institute of Race Relations (IRR), a liberal think tank that promotes political and economic freedom.
