After listening to the mini-budget this week, I think I understand what is going on; we are being governed by Wilkins Micawber, a character from Charles Dickens’ David Copperfield, imprisoned in a debtors’ gaol, pawning his devoted wife’s family heirlooms, and always recklessly optimistic that ‘something will turn up’.
This week, Minister of Finance Tito Mboweni confirmed that the South African economy is in great trouble and headed for more. The 2019 budget deficit is projected to be almost -6% which is nearly twelve times the expected rate of economic growth. The growth outlook has been lowered to 0.5% at a time when emerging markets are averaging growth rates almost ten times as much. Government debt levels (as a share of GDP) have increased by almost 100% in a decade, and personal income tax, measured as a share of GDP, has reached an all-time high point
Put all that into language a normal person can understand, and the government is spending far more than it earns, while borrowing unsustainably to finance the shortfall, and taxing ordinary people to the greatest extent ever. If your household finances were run in this manner, you would find yourself in debtors’ prison.
But the ANC has faced such a position before.
The numbers on debt, the deficit, tax to GDP, and growth faced by Mr Ramaphosa and his administration show strong similarities to those inherited my Messrs Mandela and Mbeki in the 1990s. On coming to power, the two men inherited a deficit of around -5%, economic growth was dipping towards 0%, debt levels had surged to a high of 48% of GDP, and the income tax-to-GDP take was reaching a record high.
However, in just over a decade, they took the growth rate to 5% of GDP, the budget deficit was transformed into a surplus, government debt levels had been cut in half, and the income tax burden had been greatly lessened. In understanding how they did that, and why Mr Ramaphosa is failing to do the same, five differences between the two administrations and eras stand out.
The first is that Messrs Mbeki and Mandela were firm in isolating left-wing ideological influences and trade unions in order to force mainly pragmatic policy on their party. Mr Ramaphosa, on the other hand, indulges and appeases such influences and has handed them much of the Cabinet, with the result that structural reform is permanently delayed.
The second is that Mandela and Mbeki inherited an efficient, world-class, energy parastatal in Eskom (its credit rating was better than the government’s at the time of the transition) that was producing cheap and surplus electricity. Mr Ramaphosa is faced with a corrupt, inefficient, overstaffed, loss-making parastatal, and stuffed full of ruling party hacks and cronies who are presiding over ageing and poorly maintained infrastructure. Forecast energy shortages are sufficient to cap economic growth at a maximum rate of around 2% – a position that can only be resolved through policy reforms which unions, Mr Ramaphosa’s Cabinet colleagues, and, by many accounts, he himself refuse to indulge.
The third is that, in the mid-1990s, interest rates were still over 20% and would be cut in half in an environment of relatively low household debt levels – allowing the Mbeki and Mandela administrations to tap consumer spending to boost growth. Now interest rates may have bottomed out, household debt levels have escalated, job growth is stagnant, and real per capita GDP is falling, meaning that no consumer spending-based kickstart can come to the rescue of the economy.
The fourth is that, in the 1990s, tax rates were reduced as revenue rose sharply (a counterintuitive but quite well established tax principle) while the economy expanded. Now, however, the policy of the government is to raise new taxes and tax rates as the economy stalls with the effect of worsening the extent of the stall. As one peripheral example, this week the sugar industry complained of the thousands of job losses that had ensued from the recently introduced sugar tax – purportedly a health measure but in practice a VAT increase by stealth. And here I want to say something; we had warned on exactly this when we did research into the subject but the warning was ignored because some of that work was funded via a grant from Coca-Cola and the media and left-wing commentariat were so excited at the chance to attack ‘big sugar’ that they completely lost interest in the fact that thousands of ordinary people from poor backgrounds were about to lose their jobs.
Worse is that, in addition to traditional direct and indirect taxes, the scope of BEE regulations has the effect of further taxing investment and entrepreneurship, thereby reducing local economic competitiveness – and, with it, job creation and socio-economic upliftment.
Fifth is that Mandela and Mbeki had the further good fortune of coming to power just as the global economy, and with it commodity prices, lifted. Mr Ramaphosa faces the prospect of global stagnation or even a contraction, with little chance, therefore, of commodity prices repeating the super-cycle highs reached 15 years ago. A ‘commodity bailout’, something the ANC had hoped for, is therefore not on the cards. In any event, mining policy, especially with regard to its ‘empowerment’ provisions, will see South Africa largely miss out on a commodity boom even if there was one.
As policy analysts, it is quite something for us to observe the Ramaphosa administration. As the economy sinks around it, the administration does nothing to intervene in a manner that can turn the economic tide, but remains so immensely hopeful that it will turn.
When it does act, it is to raise minimum wages, enforce more onerous BEE provisions, raise taxes or threaten expropriation – all of which is done with the most cheerful countenance, even though it is sure to worsen the performance of the economy.
The rest of its time is spent on equally cheery panels, hopeful summits, optimistic committees, and related gimmicks, the limited PR value of which is wearing thin. From what we can see, the administration is set to carry on like this in the hopeful expectation, it seems, that ‘something will turn up’. If it does not, then in time the government will be forced into implementing a prescribed assets scheme, exhausting the country’s reserves, perhaps printing money, and, after all of that, surrendering policy sovereignty either to the Chinese or to the IMF in exchange for a bailout.
Yet none of this seems to worry the broader administration much – as it wouldn’t Mr Micawber, who might say, ‘Welcome poverty! Welcome misery, welcome homelessness, welcome hunger, rags, tempest, and beggary. Mutual confidence will sustain us to the end!’