STUART THEOBALD: You don’t know what you’ve got until it’s gone

Posted in: Economics, i-Blog, South Africa on February 24, 2020


SA had a budget surplus 12 years ago, but now Tito Mboweni has to raise taxes from an economy in decline

This column was first published in Business Day 

This is the worst of times for the finance minister. But think about the best of times. In 2007, then finance minister Trevor Manuel announced a budget surplus in what was perhaps the most triumphant budget speech since democracy.

“Sound management of public finances and the improved tax compliance culture on which it rests provides us with the resources to invest in our public services, renew our infrastructure, reshape our residential areas, provide water, electricity, housing, sanitation, schooling, health care and access roads to millions who were previously denied these elementary building blocks of modern society” he said then.

We did not know how good we had it. The economy had grown 4.9%; employment had risen 3%; there was a fiscal surplus of 0.7% of GDP. While the global economic environment was positive, there is no doubt that reforms driven by the Mbeki government meant we could take advantage of it.

This week’s budget speech is the toughest since democracy. Tito Mboweni is torn by irreconcilable ends: he must cut back government spending while assuring unions that job and wage cuts are not in the offing; he must convince a sceptical public that the government really is pushing ahead with the structural reforms his department has highlighted, while sidestepping vociferous opposition from some in his own party; he must somehow raise taxes from an economy in decline.

Yet in 2007, the political putsch that ejected president Thabo Mbeki, and ultimately Manuel, was growing. The economic successes had to be undermined through a political strategy. Growth, it was said, was “jobless” even though the unemployment rate had fallen from more than 30% in 2001 to 22% that year. Economic policy was increasing inequality, it was claimed, even though tax revenue had grown 17% in each of the previous three years, financing an unprecedented increase in social spending.

Thinking back is a salient lesson that economic critique is often political, not factual. We can see it now as Jacob Zuma’s desperate effort to avoid the corruption charges he was (and still is) facing and the need to stay out of jail.

The political strategies to undermine President Cyril Ramaphosa and Mboweni include the usual array of economic distortions. It is popular to argue that our problems can be solved by macroeconomic stimulus: shower more money on the economy through low interest rates and greater spending and the economy will magically grow. This argument is an effort in avoiding the more painful work of actual reforms. Pouring water on a bed in which no seeds have been planted will not help.

We first need to fix the bottlenecks and barriers that are frustrating growth. We need to build the infrastructure to support the economy, unlock the private sector now tied up in policy uncertainty over mining, oil and gas development, visas and spectrum, and much else. We need to tackle state inefficiency — shifting operational risk to the private sector where the public service is failing to deliver. (That does not necessarily mean privatisation. The private sector can run state assets.)

This week, Mboweni has no positive news to tell us. Economic growth this year is expected to be 0.6% against a world average of 3.3%. Debt will be about 68% of GDP, likely to rise close to 80% in three years. (In 2007 that figure was 26%.)

We are very likely to lose our last investment-grade rating from Moody’s Investors Service in the wake of the speech. That will increase the cost of raising debt. We are already spending about 4.4% of GDP on servicing debt, and that will grow, sapping resources from growth-enhancing investment and spending on social services.

Wage bill growth

This exceedingly weak environment makes the politics even harder. While Mbeki and Manuel saw the political earth move beneath them in the best of times, Mboweni and Ramaphosa must face it in the worst of times.

There is no way to begin driving the change needed to redirect the economy without winning some political battles. The public service, having abandoned the “sound management of public finances” that Manuel referred to, with 92% of municipalities now unable to receive a clean audit, has enjoyed a wage bill growth of 60% over inflation. The 2.1-million public servants will not willingly accept any reversal in their fortunes. There are, of course, dedicated and hardworking public servants who are trying to fight the scourge, but their task is immense against the venal vested interests that benefit from the status quo.

That is at the bottom of the pyramid, but at the top Ramaphosa faces threats from Luthuli House and beyond, including the rump of former Zuma supporters whose fear of consequences is every bit as desperate as Zuma’s once was.

Mboweni will deliver some easy wins, but on the hard choices all we will get is frustration. The best Mboweni can realistically offer is the hope that this really is the worst of times, that while the path ahead is arduous, it will not amount to continued decline. That perhaps will be enough to maintain hope that one day 2007 won’t be our best year.

• Theobald is chair of Intellidex.

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