South African economy: prospect of severe fiscal crisis fades
The prospect of a severe fiscal crisis in South Africa has diminished. Just under two years ago, when the country lost its last investment credit rating, it certainly wasn’t. The trajectories of government debt and revenue seemed out of control, and it was not clear that the national treasury would be able to withstand demands from all sides to keep spending.
The problem is that such a risk is self-reinforcing. Because corporate investment decisions are all forward-looking, they take into account the possibility of a collapse in public finances. This would inevitably trigger a wider economic crisis, leading to major shocks for all businesses. A year and a half ago, many companies would have been reluctant to commit to several years of investing. This has resulted in lower economic growth, government revenues and employment.
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But the National Treasury is keeping its word and companies are starting to regain confidence. The medium-term fiscal policy statement two weeks ago showed more evidence that debt is under control and that the Treasury maintains a firm grip on spending. This is all the more important given that the calls to the Treasury to turn on the taps, in particular on social spending, have been strong and incessant. It also had to impose wage restrictions on a civil service that had become accustomed to real annual increases. Being able to hold the line was an important signal to businesses that the Treasury remained firmly on top of public finances.
Ironically, this is essential for integrating a lasting solution to the welfare needs of a large part of our population. While the Treasury could have simply granted requests for programs with annual costs ranging from R50 billion to several more, it could never have been more than in the short term. Such demands should have been funded and the only choices are higher taxes or more debt. Both would have dealt a serious blow to business confidence, with taxes potentially weighing heavily on the disposable income of the economy (although somewhat offset by increased spending by welfare recipients) and increased debt again destabilizing the government’s financial situation. It would have put us back on the road to financial ruin.
Instead, the Treasury was able to improve the fiscal outlook from where we were in February thanks to an unexpected windfall in mining taxes. This additional collection of 120 billion rand allowed it to finance the special Covid subsidies instituted during the closures to support the most vulnerable, as well as to increase debt repayments. As a result, the debt outlook projects that the government will achieve a primary surplus (which excludes debt-related costs) in 2023/24, which will mark when the overall level of debt begins to decline. The mineral windfall has been rightly viewed as a short-term windfall that will not hold up in the long term.
Economic growth is the only lasting solution to the poverty faced by many people in our country. This requires companies to be convinced that the fiscal position is not threatened. Growth has a double impact on poverty: it creates income that the government can then use to finance better social protection, and it creates jobs that decrease the need for social protection in the first place. This is what we achieved in the decade up to 2008, a period of growing business confidence, investment and jobs, as the government’s welfare program grew. is significantly expanded without harming the financial health of the state. We should do all we can to repeat this performance.
We will begin to see the fruits of the recovery in business confidence. For example, many companies are planning multibillion rand 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 larger infrastructure investments, from ports to bulk water.
Another obviously important signal will be the February budget, and the Treasury will then have to show that it continues to hold the line. If successful, it will add positive momentum to the immunization program and structural reforms ranging from energy to broadband spectrum. These will push all growth levels higher.
One aspect of the medium-term budget what disappointed me was that small businesses didn’t have much to celebrate. I remind the minister in Business Day of his address to the Sunday Times Investment Summit in September, when he said, “We have to make business really easy. I have no doubt he will follow, but it would have been nice to find a way to give an immediate boost to the small business sector, which has more than most felt the impact of the pandemic.
We are in an emergency situation with load shedding seriously damaging our strained economy and we must do everything possible to accelerate the development of new energies and their networking. What worries me, however, is that we don’t see enough of a sense of urgency. Why haven’t we started auction window 6 yet, or auction windows 7 and 8 already scheduled?
Busi Mavuso is CEO of Business Leadership South Africa.