After the Bell: SA’s desperate need for something super boring — balanced growth

How many times have you heard the words “balanced growth”? Many, I’m sure. Sadly, it is often one of those phrases that have a mere air-filling quality. It sounds good. I mean, “balanced” is better than “unbalanced” right? But in a true economic sense, can we please inject it with some sort of meaningful meaning?

It’s not that difficult. You can do it in a single word, and that word is “Argentina”. More on this later.

The key, I suspect, to understanding how to improve lives is to ask what constitutes economic growth. GDP is a country’s total throughput over a given period. But more than that, it is constituted or calculated from four things: personal consumption expenditure, business investment, government expenditure and net exports.

At the moment, SA’s economic growth is barely 1% per year, which is way below the population growth rate. To put it another way, we are going backwards, which is why unemployment is increasing. As I have been saying for a decade now, it’s worth recording how uncharacteristic this is globally. The world is growing steadily at three times that level. We are living in a period of huge global growth and yet we are underperforming, not only in comparison to the developed world, but the African continent, the developing world, Latin America, etc. You name it, we are runners-up or even just bronze medalists.

Why is that? Let’s go back to the four components. Over the past decade in SA, there have been four trends which neatly conform to the four categories. Personal consumption expenditure in SA exploded in the early 2000s but then went into a period of high volatility and general decline, starting in 2011. Because personal consumption expenditure is such a big part of the calculation of GDP, this was an overwhelmingly important issue.

My anecdotal explanation for this trend is that a combination of things happened at the same time. From 2001 to 2010, the global commodity boom and the local housing and construction boom injected rocket fuel into the economy. That encouraged banks to relax their lending criteria, which the government strongly supported. Boom.

This was when SA’s construction companies were among the most valuable on the JSE, doing even better than the miners, who were not slouching around themselves. If you walked around downtown Johannesburg, you could see two-bit loan sharks opening on practically every corner, advertising that you didn’t need a good credit record to get hold of cash. I mean really, if that wasn’t a red flag…

South Africans went on a spending spree and like all spending sprees, at some point, the chickens come home to roost, and the bills come in. Of course, the 2009 financial crisis hurt, but that wasn’t the only issue.

From 2011 on, the government constantly underestimated GDP growth, so almost every year, it was forced to find more money. First, it did so by increasing excise taxes, then heavily taxing the rich and finally, increasing VAT. The process hurt directly, but it also hurt business confidence, and it didn’t help that State Capture was under way.

What about the second issue, government expenditure? The numbers here are underwhelming and all over the place. The World Bank says SA’s government expenditure as a proportion of GDP is about 20%, rising from 19% in 1995. That’s pretty much the global average. The IMF says the proportion was about 28% in the 1990s, declining to around 24% in 2009 and is now around 32%.

But these numbers hide two things: first, within them, there have been huge changes. For example, the state wage bill has been increasing sharply, as the Treasury now confesses. That has acutely cut infrastructure expenditure but it has also helped boost consumption expenditure.

Second, local government spending has exploded and with it, local taxes. Amazingly, the city managers of some small towns in SA get paid only a little less than Cabinet ministers; city managers of the metros get paid around R3-million a year, and Cabinet members get a total package of around R2.6-million. That is a testament to how the budgets of cities and towns have increased.

Whatever the case, this is not a great story. I think that during the 2000s, both the number and the remuneration of state employees grew, but it didn’t matter too much because income was increasing sharply. When the income stopped flowing, expectations of the public sector didn’t change, or didn’t change fast enough.

What about the balance of trade? Here too is an odd story: it was strongly negative during the good years and mostly positive for most of the bad years. But that too makes sense — while the economy was expanding, local businesses were importing tooling and commodities like crazy to increase production and sales. As business confidence declined, they stopped doing that. But generally, trade is not the bogeyman; it’s just disappointing because SA could be doing so much more with its mineral deposits.

The last part of the investment story, gross fixed capital formation, is the most depressing. It is a hard number to ascertain with any certainty, but technically it ballooned until 2009 and has peeled off since then. It’s now about 35% down since 2010, which is weird because theoretically, this was the period that Eskom and Transnet were technically investing faster than a runaway train.

So essentially, SA has relied far too heavily on consumption expenditure to hold up GDP. The increase in the government’s fiscal deficit and SA’s total debt level certainly back this up. And what happens if this continues too long? Well, Argentina. Eventually, the wheels come off, inflation goes crazy, and the value of the currency starts wobbling. The only way out is a president who leaps on stage with a chainsaw as a prop, wanting to scythe the public sector.

I suspect some people in the ANC recognise this problem; certainly, people in the Treasury do. But I fear it’s now hardwired into the ANC that the way to win back votes is to distribute more sweeties.

If the Government of National Unity is to have any real value, its partners need to push hard for that “balanced growth”, which sounds so much better than reducing consumption expenditure and increasing real investment, even though that’s what it is. DM