It is a sign of the times that after the tabling of the 2024-25 budget by Finance Minister Enoch Godongwana a news headline said he had inflicted pain on taxpayers. This is an election year. 

Godongwana had no choice, and neither does the country. Instead of dishing out election year goodies, he issued a stern warning that South Africa is paying too much to service its trillions of rand in sovereign debt.

“Debt-service costs will absorb more than 20% of revenue. To put this into perspective, spending on debt-service costs is greater than the respective budgets of social protection, health, or peace and security,” he said. 

He also lamented an almost stagnant economy, saying that annual GDP growth for 2023 is expected to be 0.8%.

At 32%, unemployment remains high and when those who have given up looking for work are accounted for, it rises to nearly 44%. Half of those without work are under the age of 35. This has been the case for years, raising the prospect of about half the population reaching the age of 50 without the industrial and other experience needed to drive economic productivity and efficiency.

South Africa’s economic problems are too many and too deep to set out in full, suffice to say that it will take many years of trying before the country reaches the levels of growth last seen in the early 2000s. There are too many binding constraints that fall outside the realm of fiscal policy, but nonetheless affect it greatly.

Although South African fiscal policy discourse tends to centre on the minister, the lesson from the past two decades is that it is the politics and the quality of leadership that set the scene for fiscal policy choices. In our case the wheels started falling off the wagon as early as 2004.

This was the year in which a slew of laws and institutions designed to fortify democratic accountability began to bite, and ANC comrades decided they did not like what they had done. These include the formation of the Scorpions, public and municipal finance management laws, anti-corruption laws, the National Prosecuting Authority, the South African Revenue Service and other similar institutions.

The arrest and indictment of prominent politicians, or being forced to pay their taxes on ill-gotten gains, led to accusations that state institutions were being weaponised against political opponents in the ANC. This feeling was given impetus by the successful prosecution of Schabir Shaik, Jacob Zuma’s alleged financial adviser, for bribing him.

Zuma’s sense of grievance provided an opportunity to both the corrupt and those who felt ideologically alienated and marginalised from the party’s economic policy thinking. For example, Zwelinzima Vavi, labour federation Cosatu’s general secretary at the time, believed the government should have run wider fiscal deficits to invest in the economy, while Thabo Mbeki’s ANC wanted to reduce sovereign debt and build capacity for countercyclical stimulus during rainy days.

Mbeki lost the ANC presidency in 2007, just as the global financial crisis was beginning to take off. By the time it hit boiling point in September 2008, the new ANC leadership under Zuma had only one thing in mind, and that was Mbeki’s removal from office, which took place in 2008 at the height of the financial crisis.

But the most consequential fiscal policy decision was to come at the beginning of 2009, when the government announced a R787  billion infrastructure investment programme over five years. This was meant to stimulate the economy, using a combination of tax revenue, which was rising, and the wide borrowing room provided by low sovereign debt.

It was this investment that set off a frenzy of looting and political infighting over the next decade, including the handing over of the reins of government to the Gupta family. The post-Mbeki period also saw the destruction of key institutions that had taken years to build. 

The R787 billion was supposed to build power stations and related infrastructure, new dams, maintain roads, buy locomotives for Transnet and trains for the Passenger Rail Agency of South Africa (Prasa), among others. It was exactly around these initiatives that the most egregious corruption took place.

In short, the borrowings went to waste because we still have load-shedding, and it’s worse. Transnet still does not have the locomotives it bought because the transactions were corrupt. Prasa bought initially unusable trains from Spain while pretending they were designed and manufactured in South Africa.

Municipalities were no different either, joining in their own frenzy of stealing, maladministration and dysfunction. For years now, the auditor general has raised alarm over most municipalities because of poor financial management and corruption.

The end result has been a dire fiscal score that has resulted in an even more precarious economic and fiscal position than the Zuma alliance complained about in 2009. The scoreboard looks truly dire, headed to apocalyptic.

Unemployment is higher now at 32% than it was in 2007, when it was just over 21%. Instead of falling, we began to see a new trend of graduates who are unemployed, and populist decisions to exclude work-seekers under the age of 35 in low-level public sector employment.

Eskom built a debt pile exceeding R450  billion, and the country’s own debt is now nearly 70% of GDP, up from less than 30% in 2007. Debt service costs are now the fastest-growing expenditure item in our budget, the second-biggest by quantum, at R356  billion and ticking up each year.

The debt taken up by Eskom and Transnet is mostly government guaranteed, which makes the government’s own borrowing more expensive. So today, unlike 2009, the government borrows not to invest in the economy but to pay its debts.

Current discourse about fiscal policy tends to ignore the fundamental question of who manages government finances. Those who argue for a large fiscal stimulus now ignore what happens under the current government when so much money is deployed into the system. It gets stolen and wasted. This occurs to the extent that if significant, highly risky and expensive borrowing were to be done now, it would be suicidal. There is nearly zero chance that history would not repeat itself, sending South Africa to the same place Zimbabwe now finds itself, a basket case despite enormous riches.

Yet, restructuring of the sovereign balance sheet is needed urgently so that debt service costs can drop, creating room for more borrowing at affordable rates to invest in people and the economy. Ultimately it is not the quantum of the borrowing that matters, but whether that borrowing produces enough economic growth to always be a manageable percentage of GDP.

The borrowing has resulted in the opposite outcomes — economic stagnation, high unemployment, political dysfunction and serious weaknesses in key institutions. That produces the high and increasing debt to GDP ratios we see now.

That initiative will not bear fruit if we do not show progress in the fight against corruption, place competent ministers and public servants in critical positions and have leaders who understand that borrowing is always against future generations. With an election on 29 May, South Africans will, wittingly or otherwise, decide on who they trust with their money.

Songezo Zibi is the national leader of Rise Mzansi.

ANALYSIS

Next week Finance Minister Enoch Godongwana will deliver his budget speech, the last before an election that will have South Africa’s economic crisis at its heart.

The day before Godongwana’s speech, Statistics South Africa will publish the country’s unemployment numbers — the news of which will probably be eclipsed by the minister’s appraisal of our fiscal predicament.

These crises — the country’s squeezed public finances and its extreme unemployment rate — are linked, although the latter may only get a cursory mention in the budget. 

On the Tuesday before the 2022 budget, the release of the quarterly labour force survey was abruptly postponed so that StatsSA could conduct certain quality checks. 

That year, the treasury’s tone was decidedly more positive than it had been during previous budgets. Then director general Dondo Mogajane wrote in his foreword that there was “a light at the end of the tunnel”, signalling the imminent end to a difficult period of fiscal consolidation.

Despite this change of fortunes, that budget contained one startling confession. Referring to the economic onslaught from the Covid-19 pandemic, the document noted: “There is a real risk that many of the jobs eliminated will not return.”

The postponed labour force data was eventually published, showing that South Africa’s official unemployment rate had risen to 35.3% in the fourth quarter of 2021 — the highest on StatsSA’s record. 

Although this number has come down, the jobless rate remains among the highest in the world at almost 32%. And, as the country’s fiscal policymakers continue to inflict austerity, the likelihood that the economy will create substantially more jobs is slim to none.

The Public Economy Projectt (PEP), in the Southern Centre for Inequality Studies at the University of the Witwatersrand, gave its prognosis of the country’s economic predicament ahead of next week’s budget. 

The project, led by former treasury official Michael Sachs, noted that in the aftermath of the 2008 global financial crisis South Africa’s economy has stagnated, resulting in declining real per capita income over the past 12 years.

This economic malaise coincided with the treasury’s policy of fiscal consolidation, administered from 2012 in an effort to stabilise public debt by cutting spending. This consolidation had a deleterious effect on the economy’s ability to grow, according to the PEP. Moreover, treasury’s cost-cutting attempts ended up having a limited effect on stabilising the sovereign’s debt. Gross loan debt increased from 23% of GDP in 2008 to 71% in 2022.

Following the more positive outlook the year before, in February 2023 the treasury was somehow even more optimistic, indicating that the government would achieve a primary surplus (when revenue exceeds non-interest expenditure) a year ahead of schedule.

But the economy’s prospects quickly deteriorated. Load-shedding intensified, causing the economy to grow by only 0.3% in the first nine months of the year. Interest rates soared, adding pressure on the economy, as well as government finances.

In the wake of much higher debt servicing costs, a larger-than-budgeted public sector wage bill, other overspending and lower tax collections, the treasury again finds itself nearing the edge of a fiscal cliff. Although some may consider this a self-created predicament, the treasury’s policy constrains the government’s ability to grow the economy.

Duma Gqubule, a research associate at the Social Policy Initiative, said next week’s budget will be a non-story insofar as economic stimulus is concerned. He suggested that the country’s crisis — which has seen it lag other emerging market economies — is an indictment of the ANC’s leadership, calling the party’s time at the helm “30 wasted years”.

But the country’s economic trajectory is probably best viewed as one of two halves, the 15 years leading up to the 2008 global financial crisis and its immediate aftermath and those that followed. 

From 1994 to 2008, growth averaged 3.6%. While disappointing, this is higher than the average growth rate over the years that followed. 

“Generally South Africans felt that things were improving. It wasn’t spectacular. But since the global financial crisis, the wheels have come off,” Gqubule said. The second period was marked by a collapse of public sector investment, in line with the treasury’s policy of fiscal consolidation after 2012, adding: “Until we start spending again, on our people and infrastructure, everything will continue collapsing in South Africa.”

But a more orthodox view of macro­economic policy dictates that, in the context of soaring debt costs, the state should abstain from spending to avoid a full-blown fiscal crisis.

Kevin Lings, the chief economist at Stanlib, said South Africa’s economy probably won’t register any substantial growth anytime soon. “For that you need a catalyst. You need something that gets it better. And what is that something going to be? There is nothing really,” he said.

Lings forecast growth of about 1% in 2024, which while marking an improvement on last year’s meagre expansion, is still very low. “It’s certainly not going to make a helluva big difference. The population grows at about 1.6%, so that’s kind of your starting point. You really need to beat the population growth rate in any economy, especially in an economy with high unemployment.”

According to Lings, this catalyst won’t come about through fiscal policy. He noted that the traditional levers to stimulate the economy — tax cuts and expanded spending — are out of the treasury’s reach.

“That is going to be difficult to stomach in the short term, because the government — certainly the minister of finance — is trying to reflect a consolidation of debt levels,” he said.

“If you cut taxes, you’re driving consumption. You’re not necessarily driving investment and employment … And when that stimulus runs out, you’re back to where you were. It’s a bit of a sugar rush, but you are not going to get sustainability.”

The government would also want to avoid taking on more debt to fund new infrastructure spending given that borrowing costs are so high, Lings added.

In the absence of fiscal measures, the government has focused its policy efforts on structural reforms, viewed as a way of improving the supply side of the economy by removing institutional and regulatory brakes on markets.

But these reforms take time to bear fruit — and there is little consensus on just how much economic growth they will end up delivering. 

In 2019, Asghar Adelzadeh, the director and chief economic modeller at Applied Development Research Solutions, compared a number of policy scenarios, assessing their potential to induce growth and create jobs.

The so-called microeconomic policy reform scenario — based on a view championed by the treasury that lifting supply-side constraints would stimulate the economy — yielded disappointing results. 

According to Adelzadeh’s report, this policy scenario would add only 0.3% to the average annual growth rate. This limited payoff suggests structural reforms need to be implemented alongside macroeconomic measures, such as increased public investment, to induce significant economic and employment growth.

This week, Adelzadeh pointed to the post-pandemic economic trajectory in the United States, where at 3.7% unemployment is running well below the long-term average of 5.7%. “During the Covid crisis, unemployment reached about 15% and has been brought down to 3.7%. In South Africa, the official unemployment rate reached 35% and has come down to about 32%. That is all that has been achieved,” he said.

America’s post-Covid employment growth is largely attributed to fiscal stimulus employed by President Joe Biden’s administration to buoy the economy through the crisis.

“The role of fiscal policy is very important,” Adelzadeh said, adding that the conservative approach to macroeconomic policy is a consequence of ideology. 

Although fiscal policy was once widely used by governments to stimulate employment, this became difficult when exchange controls — restrictions on currency outflows — were relaxed after the rise of monetarism in the late 1970s. Monetarism considers changes in money supply as the most significant driver of economic growth.

In South Africa, the Growth, Employment and Redistribution strategy, widely regarded as having failed to deliver on its core priorities, focused on the removal of exchange controls, among other things.

Adelzadeh said the post-1994 macro­economic strategy had two main aims: avoiding permanent increases in the overall tax burden and eliminating deficit spending. These have constrained government investments in infrastructure, thus deferring their economic growth and employment benefits.

“Every year at this time the chief economists of all the banks and others who support staying the course, line up behind the treasury to say … ‘There are some green shoots. We’re turning a corner, so just stay put.’ That has been going on for many years,” he said.

NEWS ANALYSIS

One of the consistent mantras when the government is tackled on crumbling infrastructure is: “There isn’t enough money.”

Here in Makhanda, some of us have been tracking funding for one water plant, allocated since 2010. When I last checked, the accumulated funding commitments added up to about R700  million — more than enough to fix all of Makana local municipality’s water and sanitation problems.

Water is the most obvious infrastructure problem. Everyone needs water and if you open the tap and nothing comes out — or it emits industrial sludge — you notice. There are problems such as bacterial contamination that are less obvious but nonetheless everyone sees the problem in some form.

Sewerage is different — unless you are close to a running sewer leak or, worse still, downstream of one.

Makhanda is a microcosm of South Africa. It is sufficiently compact that you can start at City Hall and in a few minutes, depending what direction you set out, end up in either the poorest or wealthiest part of town.

So a few anecdotes from Makhanda are representative of the country as a whole.

I occasionally take part in a weekend clean-up programme called River Rescue, started by the redoubtable Helen Holleman. The programme aims not only to clean up local waterways, but to raise environmental awareness.

These clean-ups are not fun. The stench can be overwhelming, and the filth dumped in the environment commingled with sewage has to be experienced to be believed. Most of the older locals treat these events with indifference; the majority of the volunteers are young. 

At one particularly foul site, I asked a girl what she dreamed of. Her answer: “A park.” I have never felt so helpless and unhelpful. Our small clean-up that filled a few skips would never do that. All we could do is show we cared. Older people had obviously lost hope. Already, still early in the day, the drinking was well under way.

Leaking sewers are part of every-day reality. Particularly where the poor live, because the government simply does not care about the poor, except when they can be corralled for voting.

A granny lives downstream of a leaking sewer. Her house is flooded with filth. A group of residents hear about her plight and visit. They are impressed by the dignity and fortitude with which she handles an awful situation. 

A few days later, they hear that the local ANC councillor has paid her a visit. You would think a profuse apology would be in order. But no. He craps on her from a dizzy height for embarrassing the government by talking to outsiders.

An informal settlement has bucket toilets. The municipality, despite many broken promises to eradicate bucket toilets, has stopped collecting the contents. The residents have a leaking sewer in the neighbourhood and out of desperation dump their buckets in the river of sewage.

I could go on and on, but the clear issue is: there is a systemic problem.

Why do sewer lines frequently clog, and hence leak? Part of it is inappropriate waste being flushed. But if that was the only issue, sewer leaks would not be so frequent.

The biggest problem is at the end of the line, where sewerage works are over capacity or in other ways dysfunctional. If effluent can’t flow without impediment to the end of the line, pressure will build up and result is spillage.

How bad is it?

One measure of sewerage plant failure is downstream microbiological contamination. In the government’s 2022 National State of Water Report, only 14% of water services authorities achieved 89% compliance, the threshold for being considered excellent. Some 20% of these authorities around the country had no data, not a recipe for confidence. 

Microbiological compliance is based on measuring E. coli or faecal coliforms (a broad group of bacteria that includes E. coli), bacteria that should be eliminated from the waste stream. Healthy animals (and people) have coliforms in their gut but some can be harmful. Sewerage plants should eliminate all harmful bacteria before they release water. If they fail this test, it could indicate that the plant is running over capacity, leading to leaks upstream.

All of this is the routine that many of our people live through day in and day out. Every now and then a real disaster such as a cholera outbreak hits the news. But that is the exception (though it could become scarily widespread, the way things are).

Why is it acceptable for people to live under such conditions? It is as if our people do not have constitutional protections of the right “to an environment that is not harmful to their health or wellbeing” (S24(a)).

Corruption Watch’s 2020 Money Down the Drain report provides a sobering survey of the scale of the problem in both the water and sanitation areas.

Because water and sanitation are such essential services, they attract massive funding and massive funding attracts massive fraud.

Corruption Watch recommends a range of measures to reverse corruption in this sector, including designating the area as an “island of integrity”, with an anti-corruption forum that would direct reports of corruption to the agency best able to deal with them. Another proposal is to end impunity — which in effect means that adverse findings of the auditor general should actually have an effect.

They propose further measures. But none of this matters if we have a government that does not care —unless people stand up for their rights.

Let us take just one example: making audits stick. The key legislation — the Public Finance Management Act (PFMA), Municipal Finance Management Act (MFMA) and Public Audit Act (PAA) — have provisions for recovering fruitless, wasteful or irregular expenditure from those responsible.

The auditor general’s office has powers under the latest PAA that took effect in 2019 to issue Certificates of Debt if such expenditure is discovered, consistent with the requirements of PFMA or MFMA. How many such certificates of debt have been issued? I am not aware of one. Yet my own Makana municipality has had years when there have been more than 90 items in the audit disclaimer.

Taking a cue from the Corruption Watch report, what we need is tight monitoring of a few critical sectors such as water and sanitation, and ensuring that those responsible for corruption or wasteful expenditure (often the same thing) are held to account. They should be forced to pay the money back and face criminal prosecution if there is outright theft or fraud.

The problem is: how to get all this enforced? Again, the Corruption Watch report provides a pointer: anti-corruption forums. If the government does not form them, there is nothing to stop civil society from doing so. Such a forum may not have the weight of state power, but it can put pressure on state institutions. It can feed evidence to the Special Investigating Unit, it can launch legal actions against state entities that manifestly fail in their duties and it can create political pressure to force the government to act in the best interests of the residents (sometimes called “doing their job”).

Why does all this matter?

Because it is the poor and the vulnerable who are harmed the most. Those with more money can buy their way out of the problem, or have more political power to force problems to be fixed in their home patch.

If we feel for the granny whose home was flooded with sewage, the child who dreamed of a park or the shack dwellers whose bucket toilets feed a leaking sewer, we can and should demand better of the government. And if it does not perform we need to form civic movements that will force it to deliver.

The failure of investigative bodies and prosecuting authority to secure accountability for high-level corruption and economic crime is one of many serious risks to South Africa’s future. 

While reforming these agencies will take more than money, the government’s commitment to austerity risks undermining efforts to challenge the impunity enjoyed by the wealthy and powerful.

The Zondo commission’s final report made strong findings on the systemic causes of state capture and called for institutional and legislative reform. But it also called for criminal investigation and prosecution of hundreds of politicians, companies and fixers that facilitated and benefitted from corrupt deals during the era of Gupta-led state capture. 

I am writing this just shy of two years after the release of the first volume of the report. In that time, while several high-profile criminal cases have been enrolled by the National Prosecuting Authority (NPA), no convictions have been secured. 

The first high-profile case to reach trial — the Nulane case in the Free State — fell apart. The case was dismissed without the accused having to present a case and the judge excoriated the NPA and police’s failings. In other instances, cases have been enrolled but repeatedly delayed, often at the NPA’s request.

One of the causes for these ongoing failures is a key characteristic of state capture that the Zondo commission elected not to address. This was the decades-long interference and capture of key law enforcement institutions, including the NPA and the Directorate for Priority Crime Investigation (the Hawks). 

Some of this interference, including the disbanding of the Scorpions and interference at the NPA, predated Jacob Zuma’s presidency. But evidence presented to the commission showed how this pattern continued during the Zuma administration. 

Senior officials were appointed to the NPA and the Hawks to act as deliberate bottlenecks to slow down or undermine cases. In a report on this issue, titled Bad Cops, Bad Lawyers, Open Secrets showed how these bottlenecks instituted charges against corruption fighters without sufficient evidence and unduly delayed important cases. The report argued that holding these officials accountable was vital for any true reform of these agencies. 

Given the above, it will take more than money and resources to reform these agencies. Yet properly resourcing them is an essential part of empowering them. The government’s steadfast commitment to austerity puts this at risk.

In a statement on the recent Medium-Term Budget Policy Statement, the Institute for Economic Justice described government’s pursuit of growth by cutting spending on basic services and other important areas as akin to “trying to drive uphill with the handbrake on”. The institute’s argument is that an obsession with cutting spending ignores the potentially catastrophic social and economic consequences that will result in the short and long term.

This metaphor of trying to drive uphill with the handbrake on is apt when considering the government’s stated support for accountability alongside its failure to adequately resource the Hawks and the NPA. 

Over the past few years, these agencies have repeatedly argued that real-term declines in their budget allocations have left them with insufficient skills and resources to do their work. 

In 2021, the NPA warned that it would not have sufficient budget to pay the prosecutors that it needed to undertake its work. In 2022, it called for more than R2  billion extra over three years to “successfully prosecute state capture cases”. In September this year, after further budget cuts, it abruptly announced the suspension of any intake for the 2024 aspirant prosecutor programme because of “government-wide budget cuts”.

In its 2020-25 strategic plan, the NPA explicitly says budget cuts and austerity have “dented” initiatives to improve skills and strengthen the organisation. While the government has argued that making the Investigating Directorate a permanent institution is a key part of its efforts to address corruption, there are concerns that there will be no money to properly resource it when it is made permanent.

It is a similar story when it comes to the Hawks. The Hawks is, in theory, the elite police unit tasked with undertaking investigations into the most complex and important cases linked to corruption, corporate criminality, illicit financial flows and organised crime. 

In 2022, the Hawks told parliament that it was operating with less than half the staff it required and that it had insufficient investigators to take on complex cases. 

This came a year after it was revealed that Steinhoff had provided R30  million towards the investigation of the fraud at the company because the NPA and Hawks didn’t have the budget for such a complex investigation. Not only did this mean the investigation was “irretrievably contaminated by conflicts of interest”, but there has still been no criminal charge brought against Markus Jooste, the former Steinhoff chief executive who masterminded the fraud and who has been indicted in Germany.

The government’s failure to provide these institutions with adequate resources reflects two important facts about the status quo. 

The first is this government’s poor, and sometimes bizarre, prioritisation. In the current financial year, the state is shelling out R3.76  billion for VIP protection services for a couple of hundred politicians. It is providing only R2.2  billion for the Hawks. This is just one example. 

Over the past 10 years, the state has spent nearly R50  billion on bailing out the mismanaged state airline SAA, while spending on law enforcement agencies and other social spending has plateaued or been cut in real terms.

The second is the government’s short-termism that ignores the real long-term cost of weakened law enforcement institutions. In purely monetary terms, skilled and resourced law enforcement agencies are better able to retrieve stolen assets and recover the proceeds of crime for the state. 

By February this year, the NPA had obtained R13  billion in freezing orders, nearly triple the NPA’s annual budget. Ensuring that all of these assets are subsequently forfeited to the state requires the NPA to be properly resourced. Further, delayed investigations and prosecutions allow other stolen assets to be dissipated and undermine the chance of recovery.

There are also important systemic benefits to having law enforcement agencies able to investigate and prosecute the powerful and wealthy. It breaks cycles of impunity and disrupts the corrupt and criminal networks who are integral to efforts to undermine and capture law enforcement agencies. 

It is also essential to rebuild public trust in the state. Further, while individual prosecutions can’t bring about immediate systemic change, regular convictions of private and public actors is vital in changing the calculus for those involved in crime by ensuring consequences for criminal conduct. 

We should also not forget the international consequences of South Africa’s law enforcement failures for the country. This month, Finance Minister Enoch Godongwana admitted that the single most important obstacle to South Africa’s removal from the Financial Action Task Force’s “grey list” is the ongoing failure to demonstrate that the country can investigate and prosecute complex money-laundering and other financial crimes and recover the proceeds.

As argued above, more money alone will not turn around agencies such as the NPA and the Hawks. Both are undermined by their lack of institutional independence from the executive, as Open Secrets and others in civil society have recently argued to parliament. 

Neither have shown sufficient desire to get their own houses in order and pursue accountability for their own who are implicated in malfeasance and a failure to do their jobs. Nonetheless, the evidence suggests that any efforts at reform are also undermined by the government’s programme of austerity.

As with all the consequences of austerity, this has inequitable outcomes. The greatest beneficiaries of weakened law enforcement are powerful politicians, large corporate actors and their executives, who are implicated in often complex economic crimes and state capture. 

While they often bemoan state failure, they benefit from the continued failure to investigate and prosecute their conduct. The wealthy and powerful are also better able to protect themselves from the other negative consequences of the failure of law enforcement and prosecuting agencies.

South Africa’s history lays bare the price of impunity for economic crimes. The treasury insists the country can’t afford to properly fund these institutions. It should ask if we can afford not to.

Michael Marchant is the head of investigations at Open Secrets.

This article forms part of the fourth instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects.

In his budget speech that year, then finance minister Trevor Manuel reflected on the financial distress endured by other countries during the period, including Russia, which ended up defaulting on its debt. 

In spelling out South Africa’s predicament, Manuel used a common analogy. “Like any household, the government cannot spend what it does not have, and increasing the level of indebtedness will simply make us vulnerable and threaten our transformation agenda.”

LISTEN: The Fiscal Cliff | Episode 3 – Vaska the Cat

Today, as the country awaits the next update on the state of its public purse, the prospect of a debt crisis seems more imminent than before. This is as South Africa’s fiscal position has deteriorated markedly during the course of this year, a dilemma that could see the treasury inflicting another round of spending cuts.

However, despite the commotion surrounding South Africa’s supposed descent off a fiscal cliff, the country isn’t teetering on the brink of a debt crisis — not yet, anyway.

Debt is not inherently bad for an economy, although it is sometimes framed that way. “I think in some cases it is linked to the idea of the household budget, which suggests that if you spend more than you have you’re likely to run out of room to spend and eventually reach a crisis,” Zimbali Mncube, a researcher at the Institute for Economic Justice (IEJ), explained in an interview this week.

Mncube was one of more than 100 experts and organisations who wrote an open letter calling on President Cyril Ramaphosa and Finance Minister Enoch Godongwana to halt all planned budget cuts.

Godongwana will table his medium-term budget policy statement next week. In the months leading up to the minister’s speech, the treasury has sought to impress on the government the extent of the country’s current fiscal setbacks. Some of this correspondence has been leaked to the media, creating the picture that the state is running out of money. 

In a letter to department and provincial heads in August, the treasury prescribed a raft of cost containment measures, including freezes on hiring and infrastructure projects. The treasury cited “unprecedented challenges” in the 2023-24 financial year, brought on by chronically low economic growth, revenue shortfalls and unfavourable debt market conditions.

The treasury followed up that letter by making those guidelines public. The latter document said cost containment is required to prevent the materialisation of “potentially crippling resource constraints”.

Meanwhile, another leaked document suggested that the treasury presented to Ramaphosa various cuts that would be needed to fund the social relief of distress grant, including closing certain government programmes. But the treasury maintained that the leaked presentation was not an accurate reflection of the discussion with the president.

In the face of the treasury’s manoeuvring, the open letter to Ramaphosa and Godongwana disputed the view that South Africa is on the brink of a fiscal crisis. “A sense of panic is being created in order to force through these rushed, chaotic and indiscriminate cuts in the medium-term budget policy statement in November 2023,” it reads.

“If implemented, these cuts will slow economic growth, undermine service delivery and curtail social protection, thus exacerbating unemployment, hunger and social instability, leading to a retrogression in the realisation of the socio-economic rights contained in our Constitution.”

The letter also called the cuts “self-defeating” as the austerity-induced economic contraction would make debt repayment more difficult. “Rather, the fiscus must be leveraged to set South Africa on a new economic path,” it said.

In a policy brief released ahead of Godongwana’s speech, the IEJ said economic expansion is the best defence against the feared debt crisis. According to the IEJ’s analysis, South Africa doesn’t face an immediate debt or liquidity crisis. The economy does, however, face a growth crisis.

“If you zoom in on the current debt levels, they do not indicate that we are at crisis proportions,” Mncube said, noting that South Africa’s 71.4% debt-to-GDP ratio is in line with those of other emerging market countries.

That said, South Africa’s debt trajectory does not look good, given that the country’s borrowing has consistently exceeded revenue since 2009. The cost of the state’s debt has also steadily increased.

There are two big reasons why South Africa’s debt service costs are so high, according to the IEJ. 

The first is that the country’s foreign-denominated debt — only about 11.7% of total public debt — has been subject to adverse exchange rate movements, which have added R5  billion in debt servicing costs. Second is the fact that most of South Africa’s debt is long-term. Longer-term debt is more expensive to service.

Stanlib chief economist Kevin Lings agreed that a fiscal crisis is not an imminent reality. “South Africa’s fiscal position is precarious,” he said.

“And the reason it is precarious is that you’ve got two elements working against you. The one is that debt service costs have risen dramatically. It’s going to be about 20% of revenue and obviously that is high by any standard, by historical standards and by international standards. And it appears to be rising quickly.”

The second element driving South Africa towards a fiscal cliff is low economic growth, which stands to narrow the tax base, Lings said. 

He said South Africa’s fiscal crisis has been precipitated by international factors, namely tight financing conditions and little political will to implement economic reforms. 

If the government is unable to implement any of these measures and economic growth continues to disappoint, then South Africa will face an outright fiscal crisis, he said.

“We will get further credit rating downgrades. It will become more difficult to fund ourselves. And it can start to become self-reinforcing. In other words, because your fiscal deterioration is ongoing, bond yields go up, investors want a better return to buy your bonds, which makes the cost of financing more difficult,” Lings noted.

“We are very clearly heading towards a fiscal crisis. Are we there yet? No. We have still got the ability to rein it in, to reverse it, to rectify it.” 

Although Lings suggests reducing government expenditure — specifically on the consumption side — will help the state avoid a fiscal cliff, the IEJ contends that cuts will hinder growth, accelerating the debt crisis.

Herein lies the dilemma: economic expansion is crucial to avoiding fiscal crises. But, without spending, or taking on further debt, it is near impossible to inspire growth. Meanwhile, countries such as South Africa face considerable pressure to pare back spending. 

“Cutting back government spending works in the opposite way than is intended,” Mncube said. “Whilst the view that supports the cut is that government spending is essentially crowding out private investment — and therefore it should be cut in order to bring in private investment — we say that, in a context where there is such low demand in the economy, it is actually government spending that is likely to stimulate the economy.”

Because the debt-to-GDP ratio is measured based on the size of the economy, a contraction stands to worsen this indicator. 

Lings agreed that the government is in a difficult position given that fiscal discipline constrains its ability to borrow and dole out economic stimulus. He suggested, however, that the government could change the composition of its spending — allocating more to investment and less to consumption — or it could partner more actively with the private sector.

The IEJ’s remedies fly in the face of this more conservative approach, proposing, for example, that the government borrow more. Increased borrowing should happen alongside a credible growth plan, as well as efforts to access credit on more favourable terms.

The IEJ also proposes that the government raise additional revenue by removing tax breaks on high earners, re-evaluating corporate tax subsidies, implementing a wealth tax and a resource rent tax, restoring the corporate income tax rate and clamping down on illicit financial flows. 

The think-tank suggests the government also undertake a thorough spending review, but this ought to be done transparently and by consulting various stakeholders. 

Mncube suggested there is some danger in accepting the most prevalent view on South Africa’s public finances as truth.

“It’s sort of easy to fall into the dominant view and take it as something that is true without questioning it. If everyone, including the government, is saying that the state is running out of money it is easy to take that on. 

“I think there is a need to do more to get people to read the budget and understand how things work and not use the analogy of the household … It implies that austerity is equal to saving, when in the real world it equals starvation and higher inequality.”

See “Is South Africa nearing a debt crisis?”

This article forms part of the third instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here. 

It is expected to decline for another three years. By the end of 2025, the country will have had 18 years of declining average living standards. South Africa is now an unviable country that has record levels of unemployment, poverty and inequality. 

It has the world’s highest unemployment rate. During the second quarter of 2023, there were 11.9 million unemployed people. The unemployment rate was 42.4%. About half the country lives in poverty and one in five have inadequate access to food. 

South Africa is the most unequal country in the world. The top 10% earned 67% of incomes and owned 86% of wealth, according to the World Inequality Lab. 

We cannot continue like this. But the two most important institutions in the economy do not care about unemployment, poverty and inequality. The treasury cares only about debt. The South African Reserve Bank cares only about inflation. 

When he presents his medium term budget policy statement (MTBPS) next week, Finance Minister Enoch Godongwana will continue the treasury’s debt fear-mongering with new estimates of revenue shortfalls and spending overruns. 

In September, President Cyril Ramaphosa convened a summit at the Spier wine estate in Stellenbosch to discuss the country’s finances a week after he said a basic income grant would replace the R350 a month social relief of distress grant.

The treasury went to the summit with a political agenda to scare the president into not implementing a basic income grant, which it opposes. In a presentation, the treasury proposed the most severe austerity measures since 1994. In a policy brief, the Institute for Economic Justice (IEJ) said the treasury was exaggerating the so-called fiscal crisis for political purposes.

The IEJ has forecast a revenue shortfall of R52.4  billion and a spending overrun of R67.9  billion to R123  billion. This will result in a budget deficit of 6.3% of GDP. The 2023 budget forecasted a deficit of 3.9% of GDP. The IEJ says the revenue shortfall is within historic norms and that the spending overrun is comparable to other years. 

It is also important to note that every budget misses its revenue and spending targets and 2% either way is regarded as normal internationally.

The real issue is that the February 2023 budget was the least credible assessment of the country’s finances since 1994. Revenue forecasts are based on estimates for GDP growth. But, for a decade before the pandemic, the treasury always underestimated the negative effect of its austerity policies on the economy and overestimated the effect of structural reforms on GDP growth. 

The 2019 MTBPS said: “Over the past nine budget cycles, the government has overestimated GDP growth.”

This resulted in revenue shortfalls, especially after the trend GDP growth rate collapsed from 2014 as austerity policies began to bite. From 2014-15 to 2019-20 there were revenue shortfalls of R248.4  billion — R9.9  billion in 2014-15, R14.4  billion in 2015-16, R37.1  billion in 2016-17, R55.8  billion in 2017-18, R62.2  billion in 2018-19 and R69  billion in 2019-20. 

Revenue shortfalls are the norm at the treasury because its forecasts do not consider the harm government’s own policies — austerity and interest rate hikes — and electricity blackouts have on GDP growth.

The 2023 budget also had unrealistic spending targets. It budgeted for a decline in non-interest spending in 2023-24 and primary surpluses — the budget deficit excluding interest payments — of R65  billion in 2023-24, R93  billion in 2024-25 and R138.3  billion in 2025-26. These targets were based on five dubious assumptions. 

First, it budgeted for a 1.6% increase in the public sector wage bill when it knew that this would not happen.Now the treasury says there is a fiscal crisis because it has to pay an extra R37.5  billion that it had not budgeted for. The treasury created its own so-called crisis.

Second, it assumed that the R36  billion a year social relief of distress grant that is paid to about eight million people would come to an end in March 2024 when the treasury knows that it cannot be stopped two months before an election. 

Third, it assumed that the R10  billion a year Presidential Employment Stimulus, which created more than a million work opportunities, would come to an end in March 2024 when the treasury knows that it would be electoral suicide to stop this successful programme.

Fourth, as Wits University’s Southern Centre for Inequality Studies has pointed out, the treasury has adopted a problematic accounting practice that classifies cash payments to Eskom as debt redemption and not an expenditure item. “In our view this departs from good government accounting practices and results in a better-looking but wrong deficit number.” 

Finally, the budget is based on an incorrect assumption that Eskom, Transnet and local governments can self-finance their huge infrastructure needs. An honest assessment would make provisions for such funding.

The treasury does not understand Keynesian economics 101. A national budget does not operate like a household budget. The public sector, broadly defined to include state-owned enterprises and other agencies, probably accounts for 40% of GDP. 

If the government cuts spending it reduces GDP growth, which results in a higher debt ratio. South Africa cannot cut public spending and expect to grow the economy. Austerity is a self-defeating policy that will worsen the economic crisis and result in a rising debt ratio. South Africa has a GDP growth problem, not a debt problem.

The idea that South Africa is broke and can run out of the currency that it issues is absurd. For most of the 20th century, central banks were agents of economic development. After a pause during the neoliberal era from the 1980s, the artificial separation between fiscal and monetary policy started to melt after the global financial crisis of 2008. 

The separation disappeared after the pandemic-induced recession of 2020 when global stimulus packages were $17  trillion. The International Monetary Fund says central banks financed 75% of global stimulus packages. 

There is no reason the Reserve Bank cannot fund government spending (monetary financing), lend to the public sector on favourable terms (at the repo rate) or intervene in the bond market (quantitative easing) for an extended period and determine the cost of government borrowing (yield targeting). 

SA Inc has a vast public sector balance sheet with assets of R4  trillion. These include assets worth R2.6  trillion at the Public Investment Corporation — the asset manager of the Government Employees Pension Fund (GEPF) and the Unemployment Insurance Fund (UIF). SA Inc also has foreign exchange reserves of about R1.2  trillion and cash of about R200  billion.

In the wake of the pandemic-induced recession of 2020, SA Inc created almost R60  billion out of thin air when it ran down the UIF surplus to pay 13.8  million people who were temporarily unemployed. The UIF still has a projected surplus for March 2024 of almost R110  billion. A private sector pension fund must be fully funded because it can go bust. But there is no scenario where the government can close shop and have to pay the pensions of 1.2  million public servants on the same day. 

In 2021, the GEPF had funding of 110% — R400  billion above the 90% target that its trustees have set. If it reduced its funding to 50% it would still be able to pay pensions as if it was fully funded. SA Inc’s foreign exchange reserves are R750  billion above the international rule of thumb that a country must have reserves that can cover three months of imports. Finally, South Africa’s debt ratio of 71% in March 2023 is not high when benchmarked against its emerging market peers. 

The only way for South Africa to get out of its permanent crisis is for the government to discard its failed neoliberal economic policies.

Duma Gqubule is a financial journalist, analyst, researcher and adviser on issues of economic development and transformation.

This article forms part of the third instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here. 

The same experts warn that the government’s National Health Insurance (NHI), estimated to cost between R300 billion to R500  billion annually, is not the panacea that will fix the systemic problems in the beleaguered healthcare system.

According to the treasury’s latest budget figures, spending on health has increased from just over R50  billion in 2005 to R254.9  billion in the 2023-24 financial year and currently represents 11.4% of the overall budget. The treasury’s estimated health budget will increase to R264.8  billion by 2024-25 and to about R277  billion in 2025-26, staying at 14.4% of the total budget over those two financial years.

Experts asked to analyse health spending and performance said that although the government had made significant progress in extending healthcare services to all citizens, the system is in need of a total overhaul — from who gets appointed as senior managers to balancing allocation of spending on supplies versus salaries.

LISTEN: The Fiscal Cliff | The jaws of the hippopotamus

While some experts contend that the health budget is big enough, research shows that spending on this vital line item has stagnated in real terms. Cutbacks have been intensified since the pandemic. In the second episode of our podcast series, the Mail & Guardian talks to the spokesperson of the Democratic Nursing Organisation of South Africa about how healthcare workers are feeling the spending pinch.

Alex van den Heever, of the Wits school of governance, said the government has largely failed to take advantage of the foundations of the health system that existed in 1994 to build one capable of addressing the needs of the entire population.

“Government has failed to introduce a coherent governance regime for the public system to ensure that it operates in the interests of users.

“Equally, it has failed to establish a regulatory framework that allows the private health system to operate more efficiently and fairly.” 

These issues have been addressed in various committees of inquiry, he added, but the government had not come to the party.

Van den Heever blamed a system of patronage, which became more pronounced from the early 2000s, for dragging the health service down. 

“Political actors, therefore, no longer focus on the public interest as their primary interest. As a consequence the quality of policy development and implementation has fallen to an all-time low — ensuring that the government cannot address complex social problems anymore.”

The health sector gets a good portion of the overall budget, Van den Heever said, adding that there is no reason to expand it further in the absence of strong economic growth. 

The economy’s meagre growth — attributed to the government failures on the energy and logistics front — has severe implications for the expansion of the public health system, he said. “South Africa should be growing at around 3% to 4% per annum on a permanent basis. Unfortunately, due to government failures, we are not able to grow faster than around 1% per annum — at best.”

Despite a growing budget, research by the University of the Witwatersrand’s Public Economy Project (PEP) shows that healthcare budgets have come under increasing pressure. The PEP said healthcare expenditure has stagnated in real terms relative to the population dependent on government services. 

In 2012, there were more than 720 healthcare workers per 100 000 uninsured people. This ratio has steadily fallen since then, reaching 632 by 2018.

Spending cutbacks have been intensified since the Covid-19 pandemic, the PEP noted, with pay increases for government workers held below the rate of inflation, and across-the-board spending reductions cutting deeply into healthcare.

Van den Heever acknowledged that there can never be enough money to meet the country’s health needs, but said this predicament makes it vital for services to be planned and managed efficiently and fairly to maximise the use of resources. There are about 310 000 employees in the sector, which he said was “substantial”.

“At present, vast portions of the health budget are wasted through improper procurement and poor appointments. The present allocation, which amounts to roughly 4% of GDP, is generous in comparison to other peer countries. But the allocations are used so poorly that we have some of the worst health outcomes for a country of our level of development,” he said.

But Van den Heever believes the public sector has the “latent capability” to deliver a comprehensive range of high-quality primary care and hospital-based services.

“We are, however, not able to do this consistently throughout the entire country — largely due to governance failures at all levels of the system,” he said.

“A new governance framework is required that results in merit-based appointments and a focus on service delivery. The first step in this is to design frameworks that remove the ability of political appointees to appoint and remove people in both the administrations and services.”

Critical of the NHI, he said the plan fails to confront the shortcomings of the health system and “appears designed to reinforce the systems of patronage that have undermined performance throughout the public sector, including the health system”.

“The NHI is largely a distraction from the real reforms that should be considered. There has been no systemic reform since 2003. The NHI is a cynical distraction to avoid having to properly account for years of policy neglect,” he said.

Susan Cleary, the director of the University of Cape Town’s School
of Public Health, said the government had done well since 1994 to develop a “unified public healthcare system that caters to the majority of the population under the management of provincial departments of health”.

There had been real per capita increases in the budget for the public healthcare sector and important improvements such as largely free services, Cleary said. But the sector is hamstrung by corruption, while resources are poorly managed.

“At this stage our wage bill is starting to crowd out our spending on supplies, which is terribly inefficient. Health workers might be in the clinics and hospitals but have no supplies or other tools of their trade,” she said.

Rural Health Advocacy Project director Russell Rensburg said the post-apartheid government had invested significantly in primary healthcare, built or refurbished more than 1 600 health facilities and introduced free primary healthcare services. 

The country had done well in addressing the HIV/Aids crisis since 2002, with 90% of people living with HIV knowing their status, 77% on treatment and more than 90% of those on treatment virally suppressed, Rensburg said. Moreover, reproductive maternal and child health has improved and maternal mortality at a national level is trending down, while under-five mortality has also decreased. Much of this can be attributed to the introduction of antiretroviral therapy, he said.

But, Rensburg noted, the population’s health status is also determined by social conditions such as adequate housing, levels of education and income.

On the issue of the NHI, Rensburg said it is not “the panacea” to all problems in the sector. 

In the short term the NHI could provide an enabling framework to improve publicly funded services by segmenting the health system into district health services, providing autonomy for hospitals and ensuring services are standardised across districts, he said.

“It also allows for improved accountability at all levels of the health system as well as reducing the political interference prevalent in most provincial administrations.” 

The government needs to invest in health management information systems to strengthen governance and decision-making, while also improving the leadership capacity of hospital management and boards, Rensburg added.

“The current system of spending is not informed by need or effective use of resources; rather we allocate funding based on historical allocations.” 

Rensburg said South Africa’s goal should be to improve the health of all people and ensure equitable access to the health services they need. 

“For example we offer a comprehensive package of services in the public sector including advanced cancer care. But we don’t know if we are reaching all the people in need of cancer care ­­­— better data will assist in answering these questions as well as improving efficiency and equity.”

This article forms part of the second instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here.

In principle there is nothing wrong with austerity or saving. I knew what I wanted, cut my spending and saved enough money every week and in six weeks I achieved my goal. The sacrifice would make little sense if the price of the takkies increased every week by more than my weekly payment.

South Africa’s treasury is guilty of bad budgeting, and its budgets are criminally incongruous with the vision, policy objectives and goals of the 2012 National Development Plan (NDP). Every budget presented by the treasury should be taking us closer to achieving the goals of the NDP, yet the treasury seems more focused on servicing debt and reducing departmental spending to supposedly stop corruption and theft within the government. There are events that could irrevocably change the material reality, such as the Covid-19 pandemic, but the plan could be amended and timelines lengthened. For example, we can say a goal will now be achieved in 2028, instead of 2023. 

In June the Public Economy Project (PEP), a project of the Southern Centre for Inequality Studies at the University of the Witwatersrand, released a study entitled: Austerity Without Consolidation: Fiscal Policy and Spending Choices in Budget 2023.

The study pulls no punches, notwithstanding Finance Minister Enoch Godongwana’s protestations that the 2023 budget was not an austerity one. The PEP document says, “Continuous austerity over the last decade has eroded the quality and value of public services on which the majority of South Africans rely … Despite intensifying austerity, South Africa appears no closer to consolidating its fiscal position.”

LISTEN: The Fiscal Cliff | The jaws of the hippopotamus

While some experts contend that the health budget is big enough, research shows that spending on this vital line item has stagnated in real terms. Cutbacks have been intensified since the pandemic. In the second episode of our podcast series, the Mail & Guardian talks to the spokesperson of the Democratic Nursing Organisation of South Africa about how healthcare workers are feeling the spending pinch.

The February 2023 total budget is R2.2 trillion. Health’s share is R259.2 billion, or 11.56% of the budget. Education, inclusive of basic and tertiary education and training, is R445.1 billion (19.85%). Essentially health and education takes up just less than a third of the budget.

But does it take us closer to realising the goals of the NDP? The NDP sets out the goals that all of government should be working towards. 

The NDP envisions a South Africa with a seamless education system by 2030 — no arbitrary distinction between early childhood development, basic education and post-school education. There would be high levels of access to education comparable to countries similar to South Africa. South Africans would be able to compete with the best in the world in the various international standardised tests. It would be an education system equipped to cater for the diversity of needs and produce highly skilled individuals, as well as a greater output in research, innovation and development.  

The NDP’s key points regarding education are that the system must be results oriented achieved by the government working with people so that “human capacity, school management, district support, infrastructure” are prioritised.  The expected outcome would be the different types of education institutions collaborating with each other to improve the overall quality of education. The government’s regulatory bodies and advisory institutions must help the sector to achieve these goals.  

For the NDP, it is not a choice but a fait accompli that a National Health Insurance (NHI) must be introduced. For the private sector to be integrated into the NHI, it’s expected that it would take 10 to 15 years. The NHI is supposed to be implemented in phases, complemented by reducing the cost of private medical care and an improving public health sector, especially human capacity and systems. 

When we look back at what the NDP envisioned for the country in 2012, it is impossible to avoid being disheartened. Not a single budget presented by the treasury gives us a sense that there is an overall plan the government is working towards. The budget seems to be about saying that this amount of revenue has been collected in this financial year, and this is how it has been split up between the departments and the presidency. And then the departments and presidency go to parliament and say we got this amount of money from the treasury and we have shared it between our programmes like this. There is very little detail about what informed the treasury and how it arrived at these figures.  

If we scratch the surface we can easily see the ridiculousness of the so-called policy choices the treasury forces the health and education departments to make. The PEP study stated: “Funding is made available for teacher assistants in schools, even while funding for teachers and textbooks is cut, without any policy statement about what this implies for the future of the public education system. The budget implies a significant contraction in the public healthcare system, with hospitals facing the largest cuts. NHI funding is focused on the construction of new hospitals even while spending on healthcare workers, medical equipment, and operational budgets are cut. Universities and colleges are having core funding and infrastructure finance cut, yet the minister of higher education is committed to a programme of ‘massification’, which includes the construction of two new universities.” 

These obvious contradictions make it abundantly clear that the budget is far removed from the NDP and its vision.

The treasury does not seemingly have an interest in achieving the NDP goals. It seems that the stated policy objectives and legislative mandates are mere suggestions for the treasury. The PEP study says, “Treasury has begun to see the MTEF [Medium Term Expenditure Framework] as a bargaining position rather than an accurate costing of government’s programme.”

South Africans want an NHI and fully funded basic and further education system. But they are also worried about the levels of theft and corruption in the government. Most baulk at the wages of public sector staff, especially in the light of declining standards and the overall deterioration of public infrastructure. But another study by the PEP, released in October last year and titled Public Services, Government Employment and the Budget, has found that senior managers’ salaries in the government have been falling for the past decade. Yet the overwhelming belief among South Africans is that the size of the cabinet means there are too many public servants earning fat cat wages in flailing government programmes. 

The treasury exploits these negative perceptions and accords itself the role of guardian and places major limits on government spending that results in the NDP goals and milestones, such as the NHI, becoming pipedreams. There is a lack of acknowledgement that South Africans’ confidence in the government could be restored if they know what is being spent and how it will result in a better life for everyone. The treasury has become “penny wise and pound foolish” in such a way that the major changes required are not done properly, which in turn results in insufficient resources dedicated to these major changes, thus having no meaningful effect on the overall goals. For instance, instead of dedicating resources for the rapid upgrading of further education colleges, those budgets are cut and money is thrown at building two more universities.  

There is no clarity, other than consistent fear mongering that spending is out of control, that we cannot stop theft and corruption, and that we are heading for disaster unless we sell everything to the highest bidder. Our mandarins at the treasury need to accept that the plan comes first and the budget fits into the plan; not the plan needing to fit into the budget.  

The folly of the treasury’s sado-monetarism is felt every day in the health and education sectors, and South Africans should not be forced to tolerate its dictatorial tendencies. 

Donovan E Williams, a social commentator.

This article forms part of the second instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here.

Beyond profound sadness and rage at the permeance of injustice, stories like this should provoke us to investigate the economic conditions and political developments that cause needless human suffering. To solve the problems that ail our country, we must have a holistic understanding of their root causes. The desperate poverty of this family and millions more is not coincidental or exceptional. South Africans are caught between parasitic political elites who live only for themselves and corporate elites whose interests require them to put profits over the lives of people. The competing interests of the ruling elites are not only evident in the deterioration of state-owned enterprises (SOEs) but are the primary cause of this deterioration. 

Once SOEs were seen as instruments through which the government could support economic growth. By supplying water, generating electricity, commuter transport, telecommunications and freight logistics, it was hoped that state-owned enterprises would also advance socio-economic development. To grasp why SOEs such as the Passenger Rail Agency of South Africa, Eskom, the SABC and Transnet are plagued by mismanagement, financial precarity and corruption, one must consider recent changes in the state’s mandate.  

PODCAST: The Fiscal Cliff – Episode 1: We’re gon’be alright?

The nature of corruption 

Corruption has become a systemic problem and central feature of how governance is conducted, especially in state-owned enterprises. Far more than a case of a few bad apples, corruption is a symptom of the government’s inability to sustainably grow the economy and the enduring dominance of “old school” corporate elites. Former director of the Society, Work and Politics Institute at the University of the Witwatersrand Karl von Holdt correctly argues that “settler colonialism and apartheid had worked explicitly to prevent the emergence of black middle classes and particularly entrepreneurs, whether on the land, in commerce or in manufacturing”.  

One answer to limited upward mobility and little access to capital for aspirant black industrialists or  entrepreneurs was the ANC’s attempt to create a “corporate black bourgeoisie” that could become a significant force in the private sector. Under the presidencies of Nelson Mandela and Thabo Mbeki, this black business elite would be bolstered by black economic empowerment and penetrate South Africa’s corporate landscape. Although this new portion of the corporate elite retains great wealth and political influence relative to the vast majority of the black population, its effect on the direction of economic production or business operations is generally weak. 

For those who could not gain capital through the corporatised market, the state became a site of accumulation. Building political networks of patronage and relationships centred on cronyism, those frustrated by the limitations of the economy — both within and outside the ANC — influenced the procurement and state tender process. A process that has become pivotal to the functioning of state-owned enterprises. According to Cathrine Matidza, director of fleet procurement at the department of trade, industry and competition, “Government spends over R500 billion [a year] on procurement of goods, services.” 

Political economist Niall Reddy is precise in noting how the barriers to the corporate economy, whether it be a lack of access to business networks or the obstacle of established monopolies, discourage innovation. Instead emergent black capitalists and professionals become “sympathetic to any project that widens the domain of the state or directs its resources more forcefully to enrichment” and such actors “are more likely to excuse corruption as ‘transformation’ and less likely to share large-scale capital’s concern with delimiting the authority of the state and guarding the independence of its institutions”. 

That this ongoing crusade of criminality is primarily conducted by the government, we should not allow this to narrow our perception of the problem. The Amandla Editorial Collective accurately highlights that a new kleptocratic elite stretches from chief executives of state-owned corporations to director generals, chiefs, headmen, ward councillors and even trade union officials”. The prevalence of corruption and patronage not only results from the economic legacy of apartheid and the ANC’s failure to transform the structure of the economy, it has created a new class whose interests often clash with business elites in the private sector. 

The rise of the patronage class or the kleptocratic elite in part explains the ideological battles in the ANC when it comes to determining the function and scope of the state’s involvement in managing or stimulating the economy. The decades-long debate about what entities should or should not be privatised and the highly politicised appointments that have hurt the functionality of SOEs arise in part from a conflict over the state’s resources. Let us not be confused, ruling party elites are not committed to any substantial political transformation. Rather the call for “radical economic transformation” is a mystification that uses frustration with socio-economic inequality as a justification for key players in the kleptocracy to have more access to the state’s resources. 

Perhaps the greatest challenge to substantively reforming state-owned enterprises is the anti-democratic politics embraced by the emergent kleptocracy and its willingness to use coercive measures — whether it be intimidation, surveillance or lethal violence — to ensure pathways of accumulation in the state remain readily available. Now more than ever we must ask ourselves, what social force or political movement is equipped and determined to challenge elites both in the corporate world and in the new kleptocracy? 

From white supremacy to market-led democracy 

The state is not, and has never been,  a politically neutral structure. South Africa’s history demonstrates this clearly. Rather the state is an instrument for those who govern to implement their political interests and fulfil their obligations towards citizens through policy and legislation. How state power is wielded will depend on the political ambitions of those who have the authority or capability to access its resources or guide its mechanisms. And of course, political power is never absolute. Whether it is power used by a country’s president or a billionaire chief executive, economic conditions and political relations will have an influence on how power is used and the reach of its effect. 

The majority of state-owned entities were established during the apartheid regime to bolster South Africa’s industrial and economic capacity under the pressures of international sanctions. With the transition to democracy, SOEs would adopt a new mandate. Under pressure from international finance institutions such as the World Bank and tempted by the interests of the domestic private sector, the ANC would ascend to power in 1994 enforcing neoliberal economic principles. Described by David A Mcdonald and John Pape, this meant practising “fiscal restraint; export orientation; privatisation and corporatisation; financial and trade liberalisation, and cost recovery”. Policy and legislation was moulded to cement “the power of corporate capital at the expense of workers and poor citizens in the country”. 

Understanding the neoliberal ideology which lay at the foundation of the ANC’s macroeconomic and industrial policy, especially in the Mandela and Mbeki presidencies, helps us grasp why the post-apartheid economy has remained inaccessible for the new black business class. Moreover we must remember that under neoliberalism the state must work to create and preserve the institutional framework appropriate to neoliberal practices. It is this mandate that has led to the corporatisation of state-owned entities, the rapid spread of public-private partnerships and the deep commodification of services that millions rely on. 

Eskom stands as a tragic testimony of what happens when the dictates of neoliberalism clash with the interests of kleptocracy and a disastrously stagnant economy. On the one hand, Eskom’s corporatisation has not only narrowed streams of revenue because of the utility being mandated to a financing through the full-cost recovery model in a population where 18 million people are extremely poor and more than 10 million unemployed. Moreover, it was the commitment to eventually unbundling Eskom and creating a competitive energy market that resulted in the government putting a moratorium on investing in the SOEs’ generative capacity, resulting in the first strike of load-shedding in 2007. 

The commitment to fiscal restraint has also resulted in Eskom being denied the public funding it needs to boost capacity and conduct maintenance. Consequently Eskom has relied on borrowing finance, domestically and internationally, to ease its financial woes. This has only produced a terrible balance sheet for the utility, aggravating its debt, increasing tariffs (remember under neoliberalism, even public provision must be commodified) and, in the process, critical maintenance is neglected and energy poverty is deepened. On top of having an unsustainable corporate mandate, Eskom is then also burdened by those who seek to use it as a vehicle for accumulation, diverting vital resources away from securing the public good. 

It cannot be denied that state-owned entities are in a frail and deteriorating condition. But this reality should not compel us to be cynical and indifferent. And importantly, the failure of SOEs does not mean state utilities’ privatisation will be our salvation. Global evidence gathered over the past 50 years demonstrates that expansive privatisation fattens the wallets of business consultants and corporations, while drastically diluting the capacity of states to fulfil their social mandates, resulting in the poor and working class losing their economic agency. 

If the state can be captured by corporate or kleptocratic power, then  is it not time the state be captured and democratised by the South African people? If we do not democratise the state’s power, South Africans will continue to be collateral damage in the wars among elites. 

Andile Zulu is with the Alternative Information and Development Centre in Cape Town. He writes in his personal capacity.

This article forms part of the first instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here.

The power utility will be given more than half of this amount over the next three years through the R254 billion Eskom debt relief programme, which also happens to be the biggest bailout in the country’s history.

The debt relief is crucial, according to Finance Minister Enoch Godongwana, lest Eskom become a permanent strain on the country’s public purse. Only a year prior, Godongwana decried how more than R308 billion had been used to bail out failing state-owned entities (SOEs), money which would otherwise have gone to front line services and infrastructure.

Today, as Godongwana stares down the prospect of even more SOE bailouts, it has become clear that, somewhere down the line, the government created a monster which is now near-impossible to tame. 

Funding conundrum

A convenient place to begin to uncover the conditions that created Eskom’s burden on the economy and the fiscus is in 2007, the year that marked the start of load-shedding, as well as the government’s eleventh-hour push to get more power plants up and running. The year also marked the beginning of the end of Thabo Mbeki’s presidency, which ushered in a new era of fiscal conservatism that was ultimately overtaken by a commodity-powered spending spree.

The looming energy shortfall had been flagged years prior, in 1998, when energy experts warned that economic growth would cause demand to outpace capacity. Two years later — when Eskom went from being a statutory corporation to a public company with the state as its shareholder — the utility’s financing model changed significantly.

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For the first seven years after Eskom was formed in 1923, the utility was capitalised by government advances, subsequently converted into treasury loans with terms of up to 40 years. After 2001, Eskom had to raise its own revenue through tariffs as well as the debt market. The utility also lost its tax exempt status.

In 2004, the department of public enterprises’ budget vote flagged the severe financial implications of Eskom’s impending capacity shortfall.

The business was still profitable, but a new infrastructure build would jeopardise its otherwise sound financial position. Meanwhile, tariffs — which Eskom now relied on for revenue — had fallen, making it difficult for the utility to keep its head above water. In 2007, Eskom’s profits began falling. 

In his 2008 budget speech, then finance minister Trevor Manuel laid bare Eskom’s funding dilemma as the utility prepared to embark on a mammoth expansion through the construction of the Medupi and Kusile power stations.

 “Now that Eskom once again has a major investment programme to finance, its capital should again mainly be raised through debt and paid for by users over the course of time through appropriately structured tariffs,” Manuel noted.

“However, Eskom’s tariffs were steadily reduced in real terms during the 1980s and

1990s … The tariff structure is now too low to support the required borrowing.”

Expansion

The treasury set aside R60 billion to support Eskom’s five-year expansion plans. Medupi and Kusile were reportedly expected to come at a combined cost of R160 billion. By 2019, this amount had almost doubled to R300 billion. Last year, President Cyril Ramaphosa indicated that a further R33 billion would be needed to complete the projects, a decade after their initial deadline.

As the costs of Medupi’s and Kusile’s construction piled up, so did the treasury’s bailouts to Eskom. The utility received further equity injections of R23 billion in 2015 and R49 billion in 2019. The 2020 budget allocated the entity another R112 billion.

With a large part of its capital tied up, and with revenues hit by lower capacity, Eskom’s debt also ballooned — soaring to north of R400 billion by 2023.

Meanwhile, as Mbeki’s presidency came to an end, South Africa’s economy was walking blindfolded into a prolonged period of stagnation, which would cause spending pressures to boil over just as the country’s coffers had started to look more lean.

According to a 2021 analysis by Michael Sachs, an adjunct professor at Wits University and the former head of the treasury’s budget office, the Mbeki years post-2002 were marked by a significant expansion in spending, which continued into Jacob Zuma’s first term as president.

As the country enjoyed the spoils of the commodity boom, between 2002 and 2012, employment in the public sector grew, enabling it to serve a larger portion of the population. So did the salary bill, which years later would become the target of the government’s efforts to rein in spending.

There was also a rise in transfer payments to poor households, according to Sachs. Social grants and other transfers to households increased from 3% of GDP in 2001 to 4.6% a decade later. Transfers to local governments to fund free water and electricity to poor households increased from 0.8% to 2% of GDP over the period.

Sachs’s analysis also points to a considerable rise in infrastructure spending. Over and above the Eskom build post-2007, the budget also supported the construction of the 2010 World Cup stadiums and getting the Gautrain up and running. 

Moreover, Sachs notes, state rail, port and pipeline company Transnet’s capital formation doubled as a share of GDP, rising from 1% to 2.1% of GDP between 2005 and 2009.

Prior to the 2000s, public investment in infrastructure had stagnated. 

According to the 2011 budget documents, infrastructure investments peaked in the late 1970s — during Eskom’s last major build programme and during the development of the coal export railway line — at 16% of GDP. By 1994, this figure had declined to about 4% of GDP where it remained until the early 2000s.

Ineffective

After 2011, South Africa’s economic prospects changed markedly. As Sachs notes, it was at this time that China’s growth slowed and the commodity boom tailed off. Add to this a burgeoning electricity crisis and Zuma-era corruption — each also threatening investor and the tax-paying public’s confidence — and South Africa’s economy was in for more than a decade of pain. 

The country endured its first set of credit rating downgrades in 2012. Moody’s justified its ratings action that year by noting “the South African authorities’ reduced capacity to handle the current political and economic situation and to implement effective strategies that could place the economy on a path to faster and more inclusive growth”. 

The ratings agency also flagged that the country had lost considerable fiscal space, a predicament which worsened after the government granted public sector workers a higher-than-expected wage deal.

Successive ratings downgrades, ultimately resulting in South Africa falling into junk status in 2017, dealt another blow to public finances. 

Meanwhile, Eskom’s own ratings downgrades caused the utility’s debt position to deteriorate. Given how entangled South Africa’s economy, its public purse and Eskom are, the company’s financial stability emerged as the single-greatest risk to the sovereign’s creditworthiness. The government is the payer of last resort if state-owned entities are unable to manage their debt.

In 2018, a Nedbank research note said it was almost impossible to conceive any turnaround plan for Eskom that did not include some combination of a fresh capital injection or a plan to restructure the utility’s debt. 

It would be five more years before the government would come to the table with a plan to deal with Eskom’s oppressively high debt, a move that was widely welcomed. However, whether the debt relief programme — which will go hand-in-hand with Eskom’s restructuring — will unburden the fiscus in the long term remains to be seen.

In an interview with the Mail & Guardian, Sachs pointed to policy failures as being at the heart of the Eskom crisis. 

Sachs has previously noted that the surge of public infrastructure spending in the 1970s coincided with an increase in South Africa’s incremental capital-output ratio (ICOR), a measure of the inefficiency with which capital is used. In the 2010s, the surge in public investment — which coincided with a slowdown in economic growth — was comparatively smaller, but the escalation of the ICOR is unprecedented, according to Sachs.

Whatever the reason for this, he wrote in the aforementioned 2021 analysis, “where the public sector creates assets with a value below their cost of production, society will be saddled with servicing the liabilities that result”.

“In general, public sector prices have outpaced inflation in the private sector. A significant driver of this divergence may be the costs imposed by poor infrastructure choices.”

From Eskom’s point of view, Sachs explained in the interview, tariffs have been below the utility’s cost of production for 30 years — and the R400 billion that built up on its balance sheet was what it ought to have received to cover its costs of production.

“The problem is, when you think about tariffs, some will say that tariffs must cover the cost of production. But then other people will say that the problem is not that the tariffs are too low, but that the cost of production is too high and that you have an inefficient state-owned company that is producing at high costs. Of course, there is a bit of both,” he noted.

Build-up

The government has set a high threshold for what it expects state-owned entities to achieve, especially considering commercial conditions. 

This is true for the South African Post Office, which had a large part of its business obliterated by the advent of email, and the SABC, which has an unfunded mandate to produce public-interest content even when audiences aren’t tuning in. 

The same can be said for Eskom, which must raise revenues from tariffs the utility contends are too low, as well as provide electricity to a consumer-base that can’t afford to pay. 

When the government does not subsidise operations that don’t generate a commercial return, spending pressures build up, threatening to create a risk to the fiscus. When fiscal risk ultimately materialises, the state is forced to respond with a bailout.

The Alternative Information & Development Centre’s Dominic Brown pinpoints the beginning of Eskom’s fiscal risk to the utility’s unsustainable financing model.

Such a risk arises, Brown said, when state-owned entities have to borrow from private creditors. “Why are they borrowing? This comes down to the way that public utilities are required to operate. Inasmuch as they are public utilities, they generally have to act in the same way as any private company,” he said.

“The implication is, cost-reflective tariffs and the need to raise revenue and/or debt to be able to cover operational costs, maintenance costs and new investments. As a result, many SOEs are heavily reliant on debt to cover up revenue shortfalls.”

South Africa’s low growth trajectory may have helped delay the worst of the energy crunch. But — along with the hold-up on the Medupi and Kusile power stations, which has been linked to state capture-era corruption — the inadequate maintenance of existing power plants has accelerated the crisis.

The collapse of the country’s state-owned entities can be traced back even further, to the post-apartheid government’s early years, when the state’s investment in public infrastructure came to a standstill, Brown added. Mbeki’s structural readjustment programme reduced public gross fixed capital formation significantly, as part of an attempt to prioritise debt service costs and maintain government expenditure, he said.

“Then you have this build-up — and Eskom becomes a very clear-cut example of this — whereby a lack of investment over time catches up, especially when you are trying to provide more services to the majority of the population that was previously excluded.”

‘So many unknowns’

In Brown’s view, the R254 billion Eskom debt relief programme, which comes with conditions that will determine how the utility is restructured, will do little to relieve the public purse in the long-term.

The government laid the foundations for Eskom’s restructuring all the way back in 2001, when the utility was corporatised, but it only truly pulled the trigger more than two decades later.

Brown’s cynicism relates to the conditions attached to the debt relief, which will advance the liberalisation of South Africa’s energy sector through public-private partnerships. A number of critics have warned that this process will leave consumers saddled with even higher electricity prices as private investors endeavour to maximise profits. If energy prices become even more untenable for the majority of South Africans, Eskom’s financial position only stands to worsen.

“There are many things that are going to determine whether, at the end of the debt relief programme, Eskom costs can be covered by their revenues — including tariffs over the next three years, the direction of load-shedding and the amount of diesel Eskom burns,” Sachs said. 

“There are so many unknowns.”

Then there is Eskom’s restructuring, which requires the utility to undertake a complex institutional overhaul, Sachs said. “There are so many issues in the mix that I would be surprised that, at the end of this three-year period, the state simply says, ‘You’re on your own.’”

This article forms part of the first instalment of The Fiscal Cliff, a monthly series by the Mail & Guardian on the state of South Africa’s public purse. The series looks into the effect of fiscal consolidation on public services — which have steadily deteriorated over the years — and considers this policy’s impact on the country’s growth prospects. You can read the other article in part one of the series here.