On 15 October, President Cyril Ramaphosa unveiled a recovery plan at a joint sitting of Parliament, with the objective of rebuilding an economy ravaged by the extended lockdown imposed in response to the Covid-19 pandemic.
The Economic Reconstruction and Recovery Plan made commitments to reform that were sorely needed prior to the pandemic, but have become increasingly urgent as the impact of the protracted lockdown has pushed growing numbers of South Africans into extreme poverty and hardship.
Yet, while avowedly intended to stimulate economic growth and job creation, the stated commitment to reform lacks substance and the plan fails to address the real economic crisis South Africa finds itself in.
There is nothing in the plan on the pro-growth reforms South Africa desperately needs. There are no serious plans to reform and privatise failing state-owned enterprises (SOEs), to change South Africa’s inflexible labour market or to restore fiscal prudence.
Even before the devastating hard lockdown, the South African economy was in a downward spiral. Forecast growth – forecasts have regularly been missed over the past decade – was projected to be a meagre 1%, if that. The budget deficit stood at R371 billion and net loan debt was expected to reach R4.15 trillion, or 67.8% of GDP, by 2022/2023 – a new record high debt-to-GDP ratio, with no clear stabilisation plan in sight.
The consequence of the extended lockdown is that economy is (conservatively) expected to contract by 7.2% in 2020, with a 50% quarter-on-quarter contraction already having been recorded. Tax projections suggest revenue will not be enough to feed the government’s expenditure thirst, and the budget deficit has been revised to a whopping 37.2% of GDP, with debt service costs reaching R236 billion.
The devastating state of South African public finances presents the country with few options for recovery, and requires a long-term focus on essential reforms.
President Ramaphosa’s committing to increasing public employment by 800 000, while the finance minister Tito Mboweni is aiming to cut the public sector wage bill, means the bleak economic picture will not change without meaningful increases in private sector employment, which, in turn, will increase tax revenue.
The existing expanded public works programme, in place for over a decade, has neither made any meaningful impact on resolving long-term structural unemployment, nor produced the necessary economic infrastructure for growth.
Recovery cannot be based on continuing the state of disaster, imposing higher taxes on a smaller revenue base, increasing government expenditure, and sustaining government monopolies and excessive intervention.
The ‘recovery plan’ is flawed in that, yet again, it anticipates that a heavy-handed state can augment the role of the private sector. It cannot. If anything, this plan doubles down on the very errors that led to stagnation and mounting unemployment in the first place.
Rather, recovery must be underpinned by increasing public sector efficiency, including reducing unnecessary state expenditure, stabilising debt in the medium term, reforming and privatising unprofitable and unproductive SOEs, and reducing red-tape and policy uncertainty that deter investment, job-creation and growth. The process to stabilise national debt should be guided by a plan that lays out a clear roadmap of how it will be achieved.
National Treasury and the Minister of Finance have, on several occasions, raised alarm about South Africa’s public finances becoming ‘dangerously overstretched’, but they have stopped short of committing to any specific intervention to address this fiscal challenge.
Additionally, despite commitments to the contrary, policy uncertainty – typified by the threat to property rights in the drive for expopriation without compensation – needs to be resolved urgently and decisively in favour of growth. This needs to be twinned with a massive reduction in unnecessary regulation and the introduction of greater flexibility, particularly in the labour market.
For the necessary reforms to take place, the president needs to take inspiration from his predecessors in the 1990s and 2000s, who stared down their opponents within the party and its alliance partners, the South African Communist Party and Cosatu, and pursued growth, even where the decisions to achieve this caused ideological discomfort within the ranks.
The absence of solid commitments to reform means that the era of platitudes and decline will persist with no end in sight.
[Picture: Halacious on Unsplash]
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