Tuesday, January 18

South African Economy: Prospects for a Severe Fiscal Crisis Diminish

The prospect of a serious fiscal crisis in South Africa has diminished. Just under two years ago, when the country lost its last investment grade credit rating, it certainly did not. The government’s debt and revenue trajectories appeared to be out of control, and it was unclear whether the National Treasury would be able to resist demands from all sectors that it continue to spend.

The problem is, that risk is self-reinforcing. Because companies’ investment decisions are about the future, they take into account the possibility of a collapse in government finances. That would inevitably trigger a broader economic crisis, causing major shocks for all businesses. A year and a half ago, many companies would have refused to make large multi-year investment commitments. The result was lower economic growth, public revenue, and employment.

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But the National Treasury is keeping its word and companies are beginning to regain confidence. The Medium Term Budget Policy Statement two weeks ago showed more evidence that debt is being brought under control and that the Treasury is keeping a firm hand on spending. This is all the more important because calls to the Treasury to turn on the taps, particularly on social spending, have been loud and incessant. He has also had to impose salary restrictions on a civil service that had become accustomed to annual real increases. Being able to hold the line was an important signal to companies that the Treasury is standing firm on top of government finances.

Ironically, this is essential to incorporate a sustainable solution to the well-being needs of a large part of our population. While the Treasury could simply have agreed to demands for programs with annual costs ranging from R50 billion to multiples more, that could only have been in the short term. Such lawsuits would have had to be financed and the only options are higher taxes or more debt. Both would have been a serious blow to business confidence, as taxes could seriously affect disposable income in the economy (although they were somewhat offset by increased spending by welfare recipients) and increased debt. It would again destabilize the government’s financial position. It would have put us back on the path of financial ruin.

Instead, the Treasury has been able to improve the fiscal outlook from where we were in February thanks to a windfall from mining taxes. These R120 billion in additional collection have allowed it to fund special Covid grants instituted during the lockdowns to support the most vulnerable, as well as to increase debt payments. As a result, the debt outlook predicts that the government will achieve a primary surplus (which excludes debt-related costs) in 2023/24, marking the point at which overall debt levels will begin to decline. The mineral windfall has rightly been viewed as a short-term boon that will not hold for the long term.

Economic growth is the only sustainable solution to the poverty faced by many in our country. That requires companies to trust that the tax situation is not at risk. Growth has a dual impact on poverty: it generates revenue that the government can use to finance greater well-being, and it creates jobs that decrease the need for well-being in the first place. This is what we achieved in the decade to 2008: a period of growing business confidence, investment, and employment, while the government’s welfare program was dramatically expanded without undermining the financial health of the state. We should do our best to repeat that performance.

We will begin to see the fruits of the recovery in business confidence. For example, many companies are preparing multi-million dollar investments in power generation, an important element for long-term energy security. More will come as the Treasury lowers the fiscal outlook. We are also slowly moving towards much broader infrastructure investment, from ports to bulk water.

An obviously important additional signal will be the February budget, and the Treasury will have to show that it continues to hold the line at that time. If successful, it will add positive momentum brought about by the vaccine program and structural reforms ranging from energy to broadband spectrum. All of these will drive the highest growth levels.

One aspect of the medium-term budget what disappointed me was that small businesses had little to cheer for. I remind the minister in Working day from his speech at the Sunday Times Investment Summit in September when he said, “We have to make it really easy to do business.” I have no doubt that it will continue, but it would have been nice to have found a way to give the small business sector, which has felt the impact of the pandemic more than most, an immediate boost.

We are in an emergency situation With load shedding severely damaging our strained economy and we have to do everything we can to accelerate the development of new energy and on the grid. What worries me, however, is that we are not seeing a sufficient sense of urgency. Why haven’t we started bid window 6 yet, or have we no longer scheduled bid windows 7 and 8?

Busi Mavuso is Executive Director of Business Leadership South Africa.


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