Fifteen years of mismatched revenue and spending erased the gains of the first half of the democratic era.

In the 2010s SA chose a profoundly unsustainable fiscal path. This remains true now, and though there has been some improvement in the overall picture in recent years, our public finances remain in chronic crisis.

Fifteen years of deep structural mismatches between government revenue and expenditure have wiped out the gains achieved in the first half of the democratic era. The country is now in a far worse position: debt levels declined from 50% of GDP in 1994 to 24% in 2008, but have skyrocketed to 74% now — a rise that is among the world’s fastest.

Without a rapid, sustained increase in economic growth, there is no easy way to repair this. Compounding matters, the depth of the fiscal hole we have dug for ourselves has itself become a key reason growth cannot accelerate. This is because:

Rapidly growing interest payments are diverting tax revenues from productive uses to financing the costs of previous borrowing. Debt service costs are by far the fastest-growing item on government’s budget.

High levels of government borrowing raise the cost of finance in the economy. Interest rates on government debt are among the highest among peer countries as investors fear the government will struggle to service continuously growing debt in perpetuity while avoiding some kind of macroeconomic crisis. The interest rates that the   government pays set a floor on interest rates in the economy as a whole — why lend to a business at 5% if you can lend to government at 10%?

There is an increasing risk that government will become more active in directing scarce savings to low-productivity investments by, for example, requiring pension funds to invest in government projects. This creates significant distortions in capital markets, rendering them (and the economy as a whole) less efficient.

These factors create a vicious cycle in which increased government spending further hampers growth, as seen over the past decade. Indeed, the empirical evidence suggests that, contrary to what the proponents of increased spending believe, increases in government consumption as a percentage of GDP now slow growth rather than accelerating it.

Unproductive spending

It is not possible to address all of this in the short term. The unity government needs to recognise the chronic nature of the challenge, which will require fiscal discipline throughout the course of the seventh administration and beyond. The GNU must reconcile itself to the fact that there won’t be a period in which the government will be able to take its foot off the brake.

There is also no “low-hanging fruit” for potential spending cuts. Much of government spending is unproductive, either because it is poorly managed or because it is siphoned off through corruption and maladministration. But these problems exist across the spectrum of government’s activities, and are not concentrated in one programme that might easily be cut.

There is also no prospect that tax revenues can be increased significantly. The ratio of tax revenues to GDP is as high as it has ever been, and there is increasing evidence that raising taxes does not generate new revenues. A recent study showed that the 2017 increase in the marginal tax rate to 45% on annual income above R1.5-million led to a R6.5-billion drop in total personal income tax revenue instead of the expected R5.5-billion of extra revenue.

What to do? Our recommendations fall under two broad headings: improve the quality of spending and pursue faster economic growth.

Inefficiencies in government spending are evident in poorly performing schools, hospitals, police and courts. They are reflected in the slow pace of infrastructure development and the absence of maintenance across most of the public sector. Addressing this is of crucial importance since increased productivity in the public sector would save money and help accelerate growth.

State procurement

The most important steps for the GNU to take are to deliberately improve management, performance and accountability throughout the state. This is unlikely to deliver significant improvements quickly, so government must also address a number of other failings.

State procurement involves hundreds of billions of rand annually. Ensuring procurement decisions are driven by the quest for value for money rather than secondary objectives relating to transformation and redistribution would go far to improving procurement outcomes, reducing the administrative burden on the procurement system, and closing opportunities for corruption and self-dealing.

The GNU needs to be braver than the previous administration. It needs to recognise that not every programme is as important or as productive as every other, and that the overall efficiency and productivity of government can be improved just by cutting out the least important and least impactful programmes.

The GNU needs a process for identifying these, and then making targeted, strategic cuts so the freed-up resources can be deployed to more productive goals. One example of this lies at what is called the “centre of government” — a morass of overlapping departments and agencies with unclear, redundant mandates.

The best way to ease the fiscal mess is to get the economy growing quicker. Not only would this generate new tax revenues, but by expanding GDP it would also increase SA’s capacity to service existing debt, thus reducing risk and lowering interest rates. The essential first step to achieving this is for the GNU to demonstrate a credible commitment to reform, which would boost investor confidence and unlock private sector investment.

While there is much government needs to do to boost growth, the most important thing is to govern well and wisely and, critically, to refrain from making unaffordable policy commitments. Add to this a credible, visible commitment to tackling corruption and improving procurement and it is plausible that just governing well will accelerate growth as the private sector recommits to it.

Continuous commitment

Faster growth would also be encouraged by market-orientated reforms in key sectors now dominated by sclerotic state-owned companies whose commercial and operational crises are well known. These reforms need to be organised around the goal of increasing competition in these sectors, since it is this alone that will ensure productivity rises and supports growth in the rest of the economy. Government should also be looking to leverage private sector expertise in delivering infrastructure and public services.

Achieving fiscal sustainability is a goal that requires continuous and unwavering commitment forever. Precisely what is sustainable depends, ultimately, on how quickly the economy grows. But unless we return to sustainability, growth cannot accelerate by much. This is the dilemma we face. It means the GNU must adhere to a disciplined fiscal strategy, resisting pressures for new spending that could derail progress, for the entirety of its term.

SA’s path to fiscal health involves improving spending efficiency, fostering economic growth through better governance and bold but achievable reforms, while maintaining a disciplined approach to public finances. This would restore confidence, stimulate investment and ultimately achieve the sustainable fiscal trajectory that the country so urgently needs.

There is no trade-off between sustainable fiscal policy and growth; each is essential for the other. By committing to these recommendations SA can navigate its fiscal crisis and lay the groundwork for a prosperous, stable future.

Written by Ann Bernstein, executive director of the Centre for Development and Enterprise. This article is based on ‘Action Three: Fix the fiscal crisis’, a new report in the ‘Agenda 2024: Priorities for a new government’ series.