At the heart of the state’s grim financial position is that the plans and commitments made by the rest of government are not aligned with fiscal policy.
This is how Wits academic Michael Sachs, the former head of the budget office in the Treasury, summed up the conundrum confronting the government as it heads into budget week, when finance minister Tito Mboweni is expected to outline how the government will balance its books.
Sachs said at a conference at the Gordon Institute of Business Science on Thursday that this means that as the state keeps a lid on primary spending by reducing baseline allocations, it has supported measures that raise its cost base — such as steep wage escalations, announcing new uncosted policies and higher procurement costs to support localisation and empowerment.
But he was sceptical that Mboweni can achieve the shoring up needed without “real compromises” from business, labour and government.
The discord between fiscal policy and the rest of the government has shifted liabilities off the budget and contributed to what Sachs described as austerity, seen in the declines in service delivery in critical areas like health, without fiscal consolidation.
Financial managers across the government are left trying to implement political policies that they do not have the budget for, Sachs argued. To “square the circle” they take steps such as not paying other arms of the government like utilities, not paying suppliers or cannibalising budgets meant for maintenance, systems improvements or skills development.
“Instead of accumulating debt liabilities, risks are being shifted below the line, eroding public capabilities,” Sachs said.
This policy discord is illustrated in the state’s battle with its wage bill. While maintaining an overall expenditure ceiling and keeping a lid on the government’s primary, non-interest spending, it has been unable to contain the growth of wage increases.
Sachs used the example of a nurse in the public service, who after 11 years, has received a 6% increase on average over the past decade.
The “inevitable consequence” has been that headcounts have been forced to stabilise, with the number of full-time public servants constant since about 2012. But the number of people who rely on the public service has risen, which means “a real erosion of service delivery felt by the vast majority of the population”, argued Sachs.
However, “fiscal policy is not the source of the problem and is not the solution to the problem either”, he argued.
Calls for major fiscal consolidation, such as substantial cuts to the public sector, would “shift the burden of this adjustment onto the black poor”.
“There needs to be a sense that this burden is being shared between the sectors of the economy,” he said.
Sachs called for a “controlled but moderately less contractionary fiscal stance” that would allow debt to increase in the medium term. In exchange for this, the government needed to make “real decisions” on restructuring state-owned entities.
“The public sector is a constraint to private investment because of the way it is managing network industries. That is the core structural problem we are facing,” he said.
If the trade-off “for taking our foot off the fiscal brake” is to allow private investment in network industries such as energy, broadband and airlines, “that would be a deal worth making”, he said.
At the same time there needs to be a “public sector compact” on incomes and fiscal policy, said Sachs. “It is not a question of reducing the salary bill, it is a question of the trade-off between salary enhancements and headcounts,” he said.
This public sector compact must include limited public sector wage growth over the medium term, as well as targeted retirements in departments such as defence in return for increased public sector employment levels in areas such as health, education, policing and justice.
Alongside this there needed to be a debate about the use of quasi-public financial assets such as Unemployment Insurance Fund (UIF) surpluses — which are expected to reach R185.7bn by 2021 — for public capital spending and maintenance.
These funds should be given to working, credible public agencies such as the Trans-Caledon Tunnel Authority, the metros, the Industrial Development Corporation and Development Bank of Southern Africa to roll out infrastructure, Sachs argued.
Alongside this there needed to be a discussion with business and the country’s elites about mobilising more resources through the use of savings, as well as taxes.
“The alternative is to carry on like we are doing, muddling through, containing the rise of debt by eroding the asset structure of the public service and that will lead us into a situation where the public sector is not only weak but is incapable of leading development at any time in the future, no matter who is in government. So we need to get real and make real compromises.”
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