Eighteen months ago I published a book, On The Brink, in which I warned that unless the Jacob Zuma administration was replaced by one that charted a more pragmatic course, SA would go over the fiscal cliff just as it had already gone over the subinvestment-grade cliff — in a state of ignorance and denial.
There are two flaws in the reasoning of those who believe SA will avoid this fate, I wrote. First, they assume there is substantial room to raise taxes without hurting growth and competitiveness. And second, there is an assumption that the government will make tough, fiscally responsible choices when the crunch time comes. Well, that time has arrived.
The Treasury is only too aware of the first constraint, which is why it avoided hiking VAT, personal or company income tax in last week’s budget. But the jury is still out on my second point: whether the Cyril Ramaphosa administration is willing to cut jobs at Eskom, cull radio and TV stations at the SABC, and sell equity stakes in state-owned enterprises (SOEs) or allow them to go to the wall, to pull SA out of a debt trap.
Despite the intention to split SAA and Eskom each into three business units, it remains unclear whether the government really means to overhaul the SOEs’ business models, or whether is it still hoping to get away with just a few tweaks.
If there was any doubt that a complete overhaul is required, the bare-knuckle 2019 budget provided it. The budget wasn’t just grim, it was deeply alarming because it revealed that SA’s public finances have deteriorated to the point where there is no option left but to sell state assets and find equity partners to inject fresh capital and management into SOEs — or close some down.
“There has to be some change in direction,” says Michael Sachs, the former head of the Treasury’s budget office. “All over the public service there are agencies, like the SABC and Stats SA, that are genuinely incapable of adapting and reorganising to the financial constraints SA faces.”
It’s worth remembering how former finance minister Trevor Manuel turned around the dreadful debt dynamics he inherited from the apartheid government while undertaking expansive redress. Under Manuel, SA’s debt-to-GDP ratio more than halved within 13 years (from 50.4% to 23.9% between 1995 and 2008). It is now up at 55.6% and projected to top 60% by 2023/2024.
There were three key factors that underpinned Manuel’s success. A big one was the introduction of inflation targeting in 2000, which curbed inflation and allowed nominal interest rates to fall. This reduced the government’s debt service costs and released resources for social spending without increasing the overall spending envelope. This process of reallocation was furthered by big cuts in defence expenditure and the privatisation of public assets and services.
Privatisation yielded almost R54bn between 1993 and 2008. These proceeds were used to reduce government debt and further lower the interest burden. Researchers estimate that by 2008 these proceeds would have equalled 21% of government debt. Put differently, SA’s debt-to-GDP ratio would have been 34.2% instead of 28.3% by 2008 had privatisation not been implemented.
The view of many private-sector economists (and, no doubt, finance minister Tito Mboweni) is that the government should sell off or close many of its loss-making SOEs and open these sectors to the stiff breeze of private competition to lower the costs of doing business and grow the economy. After the state-capture imbroglio can there still be a single South African who seriously believes all these corrupted, cash-guzzling monopolies are essential to developing the economy?
It is deeply ironic that the budget earmarks R125m in new money to bolster the competition commission’s ability to reduce industry concentration and stamp out anticompetitive practices, but will spend almost R30bn this year bailing out the worst offenders – SOEs that are government-owned.
And they talk about white monopoly capital.
• Bisseker is a Financial Mail assistant editor.
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