There is a constant flow of economic statistics throughout the year: unemployment rates, inflation rates, quarterly growth figures and business-confidence indices.
The World Bank, IMF and the National Treasury publish economic growth forecasts annually. Bond, stock and derivatives markets act as giant prediction markets, in which prices reflect the collective wisdom about future performance with constant change.
The Treasury releases economic statistics and charts along with the budget speech, bolstering their position, with the finance minister’s speech interpreting recent outcomes, spinning it like a student adding context to a school report card under parental review: the exam was hard, there were headwinds, others found it easier, it was my teacher’s fault.
In the same way human health can be assessed through pulse, weight and VO2 metrics, economic statistics can assess an economy’s health, with the inflation rate, unemployment rate, sovereign debt level, credit rating and growth forecasts the most discussed.
Development economists rightly focus on absolute poverty, inequality and long-term unemployment rates, yet even they acknowledge sustained improvement in these metrics ultimately rests on economic growth, or, more precisely, real economic growth per capita.
Since monetary measurements of an economy increase due to inflation, people focus on real economic growth rates, stripping out the impact of inflation. In countries with a growing population such as South Africa, the number of people who will share the fruits of the economy is increasing. South Africa is in the unusual situation in which real GDP per capita has not kept pace with population growth, and real GDP per capita has fallen since 2008, declining 0.2 of a percentage point per year on average.
Sovereign debt trap
Economists, politicians and governments understand public spending can stimulate the economy in the short term, but spending in excess of tax revenue leads to higher sovereign debt, and it cannot happen indefinitely. Economists know this, but many politicians spend as though repayment will be another politician’s problem.
The fiscal multiplier estimates the contribution to economic growth of stimulus spending. International empirical studies (and South African research) estimate this at 0.6-0.9 — for every 1% of GDP spent in excess of revenue, the economy should grow by 0.6%-0.9% in the short run. This is because governments that take on debt to fund spending do so carefully, often limiting this spending to infrastructure that will help their economy to expand.
Since 2008 our sovereign debt has climbed from 28% of GDP to 79%. Economic theory and evidence suggest if this expansionary spending was spent on productive assets it would have contributed 2.7-4.1 percentage points to economic growth per annum, and by doing so our economy would be meaningfully larger, with lower numbers of unemployed.
With South Africa’s debt to GDP ratio hitting its ceiling, our ability to continue expansionary spending is greatly reduced.
Stripping out the contribution our expansionary spending should have had on economic growth, South Africa’s economy has underperformed by three to four percentage points per year since 2008. That we did not see any economic growth can be explained by our public spending being inefficient, either due to corruption (with many examples identified by the Zondo commission), our bloated public sector wage bill (noted by finance minister Enoch Godongwana in his budget speech) and BEE supplier premiums.
With South Africa’s debt to GDP ratio hitting its ceiling, our ability to continue expansionary spending is greatly reduced. Even as the government of national unity (GNU) rightly pursues primary surpluses, the case for deeper structural reform is overwhelming. The easy route of expansionary fiscal policy has run its course, and all we have left are debts.
The GNU is now compelled to prioritise policies that don’t require funds: business-friendly policies that improve the investment climate, clarity about private property rights, deregulation, and labour market flexibility.
Without these necessary reforms there is little prospect our economic statistics will improve, which means the average living standards of South African citizens will continue to decline. Promises of jobs and growth will remain unfulfilled.
• Becker, a retired actuary and recently qualified maths teacher, is founder of MyTutor.chat.
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