The one thing pushing South Africa to disaster

Unless the government drives economic growth and curbs its ’empty’ spending, South Africa’s fiscal multiplier will keep shrinking, putting the country on the road to disaster.

A fiscal multiplier is what economists use to measure the effect that increases in fiscal spending will have on a nation’s economic output or gross domestic product (GDP).

If the multiplier is above one (1x), spending is at least resulting in nominal growth. If the multiplier is below one, however, it means a government is spending more than it is eventually getting out.

In simpler terms, this means that each R1 the government spends results in less than R1’s worth of additional national income.

For South Africa, while the government has been spending more, it has not been spending it in places that drive economic growth or get the outcomes it desires.

For example, increased spending on education and health does not result in the skills South Africa needs or better health outcomes.

Spending on infrastructure—like the hundreds of billions spent on the Medupi and Kusile Power Stations—resulted in poor operations that required decades and billions more to rectify.

The fiscal multiplier has also been shrinking because the government has historically turned to debt to fund its ever-expanding spending spree—something which may now be back on the table.

According to Business Leadership South Africa (BLSA) chief executive Busi Mavuso, the government under Jacob Zuma turned to debt to fund government spending.

This raised huge alarms for investors, who then started leaving the country faster than the government was spending.

“We were on the road to disaster,” she said.

Over the last four years, investor confidence has been gradually restored thanks to National Treasury’s “commitment and discipline” to tackling debt and cutting spending—but this is now seriously at risk.

Mavusa noted that last week’s last-minute budget delay revealed the pressures that fall on a government when growth is scarce.

“Without growth, budget choices are far harder, requiring tougher trade-offs to ensure the books can balance,” she said.

While the move was unprecedented—and potentially knocked some confidence in the government of national unity (GNU)—the hope is that the parties involved will reach some kind of compromise that boosts economic growth.

Unfortunately, there are very few real options.

“Additional revenue is hard to find in an economy where businesses are struggling to grow and generate profits that can be taxed,” Mavuso said.

“There is not much room for the cabinet to move between last week’s aborted speech and the new budget date of 12 March.”

The government is spending more

Mavuso said that the ‘cancelled’ budget made it clear that the detail of spending is already worked out. The question remains how to pay for it.

In the budget speech, Finance Minister Enoch Godongwana wanted to increase spending on education and health, ramp up social spending on grants and give some relief to income taxpayers.

The budget also has to factor in the 5.5% increase to the public wage bill.

To cover the costs of this increased spending, the minister wanted to hike VAT to 17%—but this fell flat, leading to the new budget date of 12 March to iron things out in the GNU.

The remaining opinions are now to either cut spending, find other taxes to raise, or turn to debt. None of these are politically or economically appealing.

Opting to cut benefits—especially after the plans for increased spending are now ‘toothpaste out of the tube’—is likely off the table.

Hiking taxes is also unlikely to yield much success.

“As we’ve now learnt well, many other taxes simply fail to generate the revenue expected because our tax rates are above world averages, so taxpayers simply move their economic activity to other jurisdictions in response,” Mavuso said.

This leaves the temptation of once again turning to debt instead, which would put South Africa right back on the road to disaster.

“Debt appears to be the easy choice, enabling spending to keep going without raising any new revenue. But, in fact, debt is the worst way to go,” Mavuso said.

For every R1 the government spends, more than 20 cents already goes to paying off debt. This puts a massive strain on the budget.

International finance groups like the IMF and World Bank, as well as ratings agencies, have warned South Africa to rein in its debt, listing it as one of the biggest risk factors facing the country.

Mavuso said that it is vital for the GNU to use the budget to pursue economic growth.

This is the only way for government to be able to sustainably increase social spending while also improving its financial position, she said.