Government should spend far more, not less, to boost the economy

A central concern expressed in the Medium-Term Budget Policy Statement (MTBPS) delivered on 30 October 2019 by Finance Minister Tito Mboweni is South Africa’s increasing debt-to-GDP ratio – expected to reach 80.9% by 2028. “This is a serious position to be in,” said the minister, “the consequence of not acting now would be grave for South Africa. Over time, the country would likely face mounting debt service costs and higher interest rates and may enter a debt trap.”

The major causes of the increase in debt-to-GDP, according to Mboweni, are an increase in government spending on bailouts for state-owned enterprises, such as Eskom and SAA, and a growing public service wage bill.

As noted by the minister, the public-service wage bill, between 2007 and 2019, has increased by 66% adjusted for inflation. And, according to Treasury, 29,000 public servants will earn R1-million or more in annual salaries in 2019. In total, the wage bill accounts for 34% of the total budget – triple the amount spent in 2007 – and represents 46% of all tax revenue collected in the 2018/2019 period.

Notwithstanding the veracity of Mboweni’s statements – and kudos to him for making them – it seems credulous of the minister to expect state workers to reduce their wages voluntarily, never mind the political barriers that stand in his way. Indeed, just minutes after the conclusion of the minister’s speech, Cosatu released a statement claiming “many of the wage bill stats in the MTBPS, in fact, are distortions. On the wage bill, the minister is either fundamentally dishonest or innocently delusional.”

The labour union did not specify, however, which statements were dishonest and it would seem unlikely that the Finance Minister would deliberately distort wage bill figures.

Putting this intractable political issue aside, it did appear that the minister went out of his way to berate his own colleagues for their wanton magnanimity, making use of the technical and somewhat abstract economic concept of debt-to-GDP to prove his point. And while it does sound worrying that debt-to-GDP is on the rise, it does not necessarily seem to be the whip that would best convince a public servant to willingly reduce their salary.

In essence, what the minister is advocating is the implementation of stringent austerity measures, something akin perhaps to the austerity packages demanded by the European Union of the Greek public system between 2010 and 2017. To close the budget deficit gap, Mboweni admonishes, we must rein in government expenditure through a reduction of the wage bill, coupled with an increase in revenue collection, most likely through raising taxes. The challenge inherent in this approach is that almost half of every rand the government collects in tax is paid out in the form of wages to over a million public servants who rely on this income for a living – and which, in turn, flows back into the economy through the consumption of goods and services.

To be sure, even from an economist’s perspective – as opposed to that of a state worker – the minister’s lecture on debt-to-GDP should be given some context. At present, South Africa’s gross debt-to-GDP is at a relatively average 61% – lower than countries such as Brazil (64%), Sri Lanka (79%), the UK (84%), Egypt (91%), Spain (102%), the US (106%), Portugal (113%), and certainly lower than Japan (244%).

In his book, The Return of Depression Economics and the Crisis of 2008, Nobel Prize-winning economist, Paul Krugman, explains that austerity is not only unlikely to lift a nation out of recession, but is detrimental to any efforts to stimulate economic growth. Following the 2007/2008 financial crisis, Krugman advocated for a “Keynesian resurgence”, in line with the drastic measures taken by US President Roosevelt in implementing the New Deal in the 1930s to drag America out of the Great Depression. What this entails is a concerted effort by the government to focus on fiscal stimulus – to stimulate sustainable economic growth through large-scale infrastructure projects.

What has occurred in South Africa, however, is exactly the opposite – government spending on infrastructure has been roughly halved, from 9% of GDP in 2010 to about 4.5% in 2018. Yet, investment in infrastructure is vital for economic development and job creation. In South Africa, the construction industry employs a disproportionate number of people relative to its contribution of GDP – just 3.5% to GDP, but employing 8.3% of all employed individuals in the country.

Despite the construction industry’s critical role in economic growth and job creation, however, WBHO – one of the largest construction companies in southern Africa – states that capital expenditure by public corporations and government has decreased by 4.4% and 12.5% respectively in 2018.

To justify the reduced spending on infrastructure projects, Treasury has said “in the context of weak growth, revenue shortfalls and rising spending pressures are threatening government’s ability to maintain existing levels of service provision and infrastructure investment.” What this calls for, according to the Finance Minister is that we, as a country, need to rigidly apply a mindset of austerity to stabilise the growing debt-to-GDP ratio.

Given the weak correlation globally between low debt-to-GDP and economic wellbeing, the minister has placed excessive emphasis on his desire for a decrease in the numerator of the ratio, whilst placing far too little importance on the necessity of an increase in the denominator – GDP itself. What is really required to stimulate economic growth – as opposed to simply reducing government expenditure – is a planned and coordinated effort by the government to significantly spend on infrastructure and if necessary, borrowing even more from foreign investors to do so.

In the 1930s, the US government initiated large-scale public works projects, such as the building of hospitals, schools, bridges, roads and dams – including the $50-billion Hoover Dam project initiated in 1931 – which created millions of jobs and successfully boosted economic growth. Indeed, the success of the New Deal necessitated an increase in government expenditure and America’s debt-to-GDP increased as a result, but the economic growth that was realised lasted for generations.

I can imagine some large-scale infrastructure projects that could certainly be of use to the country. These projects may include further investment in the Lesotho Highlands Water Project, an extension of our rail network, and increased investment in sustainable energy projects, including wind, solar, and heaven forbid, nuclear. DM