This article was first published by BizNews on 28 September 2023
South Africa’s fiscal precipice: The chickens have come home to roost
According to media reports in the past few weeks South Africa is facing a fiscal cliff. Due to lower-than-expected commodity prices, higher-than-expected expenditures, government finances are facing the worst combination of circumstances. The answer lies in creating the conditions for long-term economic growth and mercilessly shrinking the size of government but these options are not without political costs in the short term.
Over the past two years South Africa benefited from higher commodity prices due to deficit spending by governments around the world to make up for their lockdowns and the uncertainty caused by the war in Ukraine. Now interest rates are on the increase as governments try to deal with the inflation they caused and markets have a better idea of how the war in Ukraine affects the costs of critical commodities. This has led to a collapse in commodity prices and therefore a collapse in the windfall revenue national treasury has been receiving since the covid lockdown.
Making matters worse is the increase in expenditure that the national treasury has had to fund outside of their initial projections. In February the government budgeted R36.1 billion up to March 2024 for the Social Relief of Distress (SRD) grant, the R350 grant given to all unemployed people since the covid lockdown. This was never meant to be a permanent grant and would not exist if the government had not pursued the disastrous lockdown policy.
At the time the SRD was first introduced as a temporary lockdown measure, some of us warned that with our high, structural unemployment rates the government would not be able to get rid of this grant once it was introduced. It would simply not be politically possible to take away money from 10 million unemployed people once they started receiving it. Three years after the initial lockdown and government is now looking for a way to make the grant permanent.
This grant will further erode the entrepreneurial spirit of South Africans and therefore make it harder to reduce unemployment in future. It’s not a coincidence that countries with a greater social safety net like South Africa and Botswana tend to have a smaller informal/small business sector than those who don’t. It will also exacerbate the entitlement problem in the country, if it is easier to burn tyres and demand an increase in the SRD instead of looking for a job or starting a business, that is exactly what young people will do.
It should also be noted that some young people have and will continue to use the SRD to start successful small businesses, this is a wonderful consequence and if this was most of the effect of the grant then the national treasury wouldn’t need to worry about anything since the grant would fund itself through GDP growth. But this is not the case for most people and so the grant is a net loss for the economy and for taxpayers.
It would be better if we never had this SRD grant but now that we have it, the government has to end it as soon as possible. We cannot afford to pay the 70% of unemployed 15-24 year olds and 42.4% of all working age adults (using the expanded definition of unemployment since all those people would qualify for the grant regardless of whether they are looking for jobs or not) for being unemployed, instead government has to act more urgently than they have so far done in creating the conditions for business growth/creation and therefore job creation.
Regulations especially in the labour market have to be cut, the tax burden has to be reduced in order to encourage investment. It is reported that Nedlac is currently in deadlock because business and labour cannot agree on the labour market reforms needed to start creating jobs. The government has to choose between jobs for the unemployed and privileges for unions and unionised workers, how they choose determines the future survival of South Africa and therefore the government itself, this is the core issue in South African politics, everything else is almost a sideshow.
In addition to the SRD grant, the government has also had to fund an unexpected wage increase for public sector employees. The government had initially budgeted for a 1.6% increase and ended up having to fund a 7.5% increase. This is a common theme in South Africa’s fiscal drama, the government continuously has to fund higher wage increases than budgeted for. One of the consequences of this is where the government needs to hire more employees, as in the police service due to the massive increases in crime, they end up hiring less because more of the budget is devoted to current employees.
This again shows the corrosive power of unions. The government has to find a way to deal with this influence once and for all. A good way to start is repealing the legislation that enables collective bargaining, the Labour relations Act. Other labour legislation like the National Minimum Wage Act and the employment Equity Act are destructive but not quite as much as the LRA. It forces everyone working for a company where some union dominates to join that union against their will, if anything this violates the right of South African workers to associate or disassociate freely.
Finally, one of the proposals to deal with the fiscal cliff according to media reports, is shutting down the SAPS’s visible policing unit to save R52.1 million. This represents another common theme in the fiscal drama: Core functions of the state like safety and security are sacrificed for politically expedient functions like grants and the wages of unionised government workers. This is being considered by a government that is hostile to private security and private firearm ownership. The government is reducing the expenditure on policing functions that protect South Africans (I am sure VIP protection will be untouched or even increased) while being opposed to the same South Africans spending more of their own money in addition to the taxes they pay, on private security and firearms to protect themselves.
This shows why South Africa needs more of a link between paying taxes and voting. While many will protest even discussing the possibility of linking the vote to the taxes a person pays, the consequence of not doing that are policies that are actively hostile to taxpayers and their safety as we see in South Africa. This is a recipe for creating a banana republic and it can only be reversed when we are ready to make the hard but rational decisions.