This is the last in a four-part series by Michael Sachs, extracted from his paper, Fiscal Dimensions of South Africa’s Crisis (the full paper can be found on http://www.wits.ac.za/scis). In the last article, he examined the extent and nature of South Africa’s debt burden, distinguishing between the level of debt and its trajectory in relation to economic growth. He argued that SA’s debt was not only an impediment to economic growth, but that it also risked undermining the progressive nature of SA’s tax system. In this article, he reviews his main arguments and examines possible avenues out of the fiscal trap.
This is the third in a series of articles by Michael Sachs, extracted from his paper, Fiscal Dimensions of South Africa’s Crisis. In the last article, he showed how the real value of public services has declined over the past decade, and how substantial off-budget allocations to state-owned enterprises have come at a cost to the poor. In this article, he examines the extent of South Africa’s fiscal crisis as the country struggles to recover from the impact of Covid-19. He argues that the recent budget proposes a path of consolidation that will erode core public services further. It will also be difficult to accelerate the pace of economic growth in the face of a large and sustained negative fiscal impulse. But even if the consolidation achieves its targets, it is unlikely to alleviate the debt burden. Rising interest payments mean that rent is drained from the proceeds of production, with implications for economic growth and the distribution of national income. Without an acceleration in nominal GDP, it is difficult to see how South Africa will avoid a period of fiscal and financial disorder.
In the first article in this series, we examined the history of SA’s economic policy and some of the roots of its current fiscal crisis. We looked at how economic growth in the country has consistently depended on the global economy and how a commodity-fuelled boom created a mirage of permanent economic growth in many developing countries, which were left without fiscal buffers once the uptick had stagnated or swung downward. In SA’s case, there were also self-inflicted blows, both economic and political, which began after 2007. But despite this, fiscal policy was expansive relying on the hope of increased growth, without sufficient planning for where it would come from. In Part 2 of this series Michael Sachs explains how austerity was implemented, almost by stealth, but without the necessary fiscal consolidation needed to avert a crisis.
At the start of the democratic project, South Africa hoped for a “fiscal renaissance”. After a brief period of consolidation, social spending rose, as did remuneration for public servants and expenditure on infrastructure. By the early 2000s, revenue was buoyant, the debt-to-GDP ratio was at historic lows, and the budget balance moved into surplus. But by the second decade of the millennium, growth faltered. And at the very moment that conditions demanded fiscal adjustment, government policy became increasingly incoherent.
A new longitudinal study of learners in public education in the Western Cape shows a marked decline in repetition rates over the past six years. The drop in repetition has also led to more learners making it through matric. The study could have significant lessons for policymakers in terms of the interventions required to reduce dropouts.
Financial inclusion has become an important measure of inclusive economic growth in South Africa, as well as in other parts of the world. But if inclusion cannot be measured accurately it leaves policymakers and market participants making inadequately informed decisions. This article discusses a new quantitative method to construct financial inclusion indices for the nine provinces. The index trends are used to evaluate the state of financial inclusion in the recent past and to make recommendations for further financial sector development policy. The country has made improvements in financial inclusion since 1994. Since then, there has been increased access and usage of financial services. However, between 2015 and 2018 there was an overall reduction in financial services. The decline has been heavily influenced by economic shocks such as decreasing income in various provinces, a decrease in credit extension to the private sector, rising unemployment rate, and rising risks to financial infrastructure. In fact, financial inclusion in 2018 fell back to the level it was in 2014 after a decline that began in 2016. Financial inclusion has increased in Gauteng, Western Cape, and the Eastern Cape; however the Free-State and Northern Cape have experienced declines to below their 2015 level, while the other provinces experienced minor declines.
The COVID-19 pandemic has exposed significant inequalities in terms of capacities to cope with such a major shock. This article uses two data sources in South Africa - the 2018 General Household Survey and the 2016 Community Survey – to develop a set of indicators to show households’ ability to cope with lockdowns, and the extent to which they are vulnerable to COVID-19. These indicators and their aggregate indices allow us to profile lockdown capacity and COVID vulnerability at the national, provincial, and municipal levels as well providing an urban/rural breakdown. There are stark spatial inequalities in both the ability to comply with lockdowns and in COVID vulnerability, and disturbingly strong correlations between the two. This has implications for budget allocations in response to the pandemic, especially as some relief funding has been and will be apportioned according to municipal need.
Women are at far greater risk of losing their income and are more likely to be exposed to the COVID-19 health risk than men because of the type of work they do.
The new African Free Continental Trade Area phases out 90% of tariffs on all goods traded between African Union member states over a 5 to 10 year period. This seeks to boost intra-African trade and investment in regional value chains. The current 41% share of SA agricultural exports that goes to Africa is concentrated in SADC. The opening of other markets presents an opportunity for further expansion in goods such as oranges, apples and wine.
The Covid-19 pandemic presents an opportunity for African governments to relook agriculture as part of the economic recovery plan. A new approach should embrace technology (information technology, mechanical and biotechnology) and private-sector partnerships, as well as the improvement in land governance through the extension of title deeds or long-term, tradeable leases. South Africa presents some examples, particularly on technological advancement, which African countries can emulate.
The economic and social crisis induced by Covid-19 is unfolding in different ways across the country. New evidence from the NIDS-CRAM survey reveals that the pandemic has widened pre-existing inequalities between cities and rural areas. Within cities it has magnified the gap between suburbs, townships and informal settlements. A premature withdrawal of government relief schemes could aggravate the hardship and suffering in poor communities that have come to rely on these resources following the jobs slump.
While the impact of the Covid-19 lock-down on the tourism sector may seem clear, the potential impact on its supply chain has not been investigated. StatsSA data is analysed to establish which goods and services receive the most expenditure from three key tourism industries, but also which goods and services rely most heavily on tourism expenditure. Surprisingly it is soft drinks, tobacco, and transport-related goods that are likely most affected, not construction or agriculture.
The lockdown and physical distancing measures of government impact small and medium-sized companies severely as they lack the financial reserves to survive the crisis. This article proposes immediate financial measures to support companies, large and small, to ensure that a liquidity crisis does not turn into a solvency crisis, putting many companies out of business – and causing large-scale unemployment. On a macroeconomic level the objective is to protect income and jobs by slowing down the rate at which aggregate supply and demand contract.
The projected increase in the debt-to-GDP ratio is set to occur notwithstanding plans to cut the projected increase in government’s salary bill. If government does not overcome labour union resistance to cuts, the debt burden will increase even more. The mounting public debt and government’s apparent inability to reign it in, raises the question whether South Africa finds itself in a debt trap, and if not, what can be done to escape such a trap.
The debt burden of the national government has steadily increased from 27% in 2007. It is heading towards 70% in 2022/3 if this trajectory is not turned around. Further growth in the debt-to-GDP ratio must at least be halted. Different scenarios show this would require a cut in government expenditure of 2% to 3% of GDP (roughly R100 to R150 billion), phased in over the medium term. This means there is no room for a stimulating fiscal policy.
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