Stabilizing our debt: the hippo in the room

The Covid-19 pandemic and the government’s mishandling of it has brought our growing debt problem to a head. How we approach it now will determine what life in South Africa will be like for generations to come. Either more and more people slip into grinding poverty, or more and more people get onto the ladder of opportunity. This is a pivotal moment in our history.

In his emergency budget speech, Finance Minister Tito Mboweni faced up to this problem: “Our Herculean task is to close the mouth of the Hippopotamus! It is eating our children’s inheritance. We need to stop it now!”

Unfortunately, he did not and could not present a credible plan to put South Africa on a path to debt sustainability and growing prosperity. Credit rating agencies are therefore more likely to move South Africa further into junk status than back towards investment grade.

We were already caught in a low-growth, high-debt vicious cycle before the government implemented the blunt instrument indefinite economic shutdown. Having dropped from 49% of GDP in 1994 to 22% by 2008, our debt was set to breach 70% in the next three years. This terrible starting point was reflected in the unemployment figures released this week which reveal 334 000 job losses in the first quarter of 2020, before the pandemic hit.

But now the cycle is that much more vicious. Collapsing tax revenues and increased spending needs have doubled the expected budget deficit (the amount by which our spending exceeds our revenue) for this year, from 7% to 15% of GDP. The result is that debt is expected to be R4 trillion, 82% of GDP, by the end of this fiscal year.

In 2020, 21c of every tax rand goes to paying back the interest on our loans. This is more than we spend on social grants, health, or policing. This number will soon surpass even what we spend on education. The hippo is indeed eating our children’s future.

The minister set out two scenarios, passive and active. On the passive path, we stay on our current trajectory with debt-to-GDP rising to 140% by 2028. This all but guarantees a sovereign debt crisis, meaning we are unable to raise any more debt. At that point, South Africa is either a failed state like Zimbabwe and Venezuela, or the IMF steps in and takes over decision-making. Either way, there’s a lot of unnecessary suffering involved.

On the active path, debt will stabilize at 87% in three years’ time and then slowly decline. This requires us to implement economic reforms that enable growth. (I have listed some of these at the end of this newsletter.) No matter how the government chooses to spin it, South Africa’s runaway debt is a direct consequence of bad policy choices. It can only be remedied by changing direction on these.

Genuine commitment and active steps to implement growth-enabling economic reform will increase our ability to pay back debt while also bringing down the cost of that debt, because lenders charge less the more confident they are that it will be repaid. Sustained economic growth is the only pathway out of poverty and towards broad prosperity in a more equal society.

Mboweni himself strongly supports economic reform. Indeed, he published a paper last year setting out these reforms in detail. His calls for reform are widely supported, including by Reserve Bank governor Lesetja Kanyago, the Democratic Alliance and other opposition parties, business organisations such as Business Unity South Africa and Business Leadership South Africa, economists, international lending institutions, and the major credit rating agencies.

Yet despite this vast weight of support, South Africa remains on the passive path to debt crisis. The few promises Mboweni did make – zero-based budgeting, restructuring Eskom – have a high risk of failing on implementation or delay.

The hippo-sized stumbling block is Mboweni’s own party. The ANC remains committed to the failed socialist ideology of state-led “development” that got us into this debt-trap in the first place. In the face of dwindling popular support, the party has been forced to appease vested interests in the ANC alliance – public sector unions and politically connected business cronies – to ensure its survival.

The public sector wage bill consumes 58c of every tax rand and this number will rise to 61c if unions have their way.

Realistically, either reformists unite to build pressure for political change, or we live the horror story that unfolds on the current dangerous and unsustainable debt trajectory.

The DA is committed to building a country that works for everyone. Financial management is measurably better where we already govern. This week, the auditor general reported that 27 out of the 30 municipalities in DA-run Western Cape achieved clean or unqualified audits. In Gauteng, the only municipality that achieved a clean audit was DA-run Midvaal.

In the end, voters need to start being realistic about what does and doesn’t work.

The DA proposes the following focus areas for economic reform:

  1. Stem the immediate bleeding by ending the lockdown and replacing it with a standard set of evidence-based safety rules and guidelines, where each regulation is directly linked to reducing the spread of covid-19. A standard set of high-impact safety rules will improve compliance and enforcement and raise economic activity. This will protect lives and livelihoods.
  2. Cut the public sector wage bill over the medium term and grow public sector productivity by: freezing wages for non-frontline workers for a three-year period; reducing head-office management staff by one third; introducing performance management systems across all sectors; appointing and promoting on performance rather than race, gender or other criteria. The money spent on salaries is crowding out productive investment in public infrastructure.
  3. Sell or shut down state-owned enterprises that are not able to survive without bailouts,and redirect the funds to service delivery and social welfare. South Africa cannot afford vanity projects such as SAA or a new nuclear build.
  4. Make electricity cheaper and more reliable for households and businesses by ending Eskom’s monopoly and opening the electricity market to competition. Municipalities must be able to buy directly from producers.
  5. Make it easier to get and create jobs by freeing up the SMME labour market. Small businesses should be exempt from the more stringent labour legislation including from agreements reached by bargaining councils.
  6. Reject investment-killing policies of EWC, NHI, prescribed assets and SARB nationalisation. Each of these policies may be well-intended, but the real-world result is to scare off investment, capital, and scarce skills.
  7. Abandon BEE system and target redress policies at disadvantage rather than race. The DA’s position paper on redress sets out the policies South Africa should pursue to remove the underlying inequalities that still exist because of past dispossession and discrimination. Abandoning BEE will make state spending vastly more efficient, which is strongly in the interest of the poor.
  8. Auction digital spectrum to bring down data costs for individuals and businesses.
  9. Reform visa regulations to enable more scarce skills to enter South Africa.
  10. Tackle corruption in the private and public sectors by establishing an independent, well-resourced corruption-busting body – effectively reestablishing the Scorpions.