Growing the South African economy is make or break for the GNU

South Africa’s expanded unemployment stands at 12.4 million South Africans, or 42.6% (up from 8.1 million, or 35.3% a decade ago); 7.3 million of whom are young. The trend line, over time, is worryingly going in the wrong direction: despite the economy adding an average of 160,000 new jobs per annum, it also added 430,000 to the unemployed per annum over the past decade.

The unemployment data informs us that while the  Youth Employment Service (YES) may be scoring significant wins with 156,000 one-year paid youth placements in businesses since 2018, of which an impressive 45% are absorbed into full-time jobs with their companies, our beloved country is frankly losing its war on unemployment. In America, as the 1933 recession peaked, the unemployment rate was just under 25%. Author Kathi Appelt observed, “An entire nation was standing in one long breadline... It was a crisis of monumental proportions. It was known as the Great Depression.”

With the cost of living today in South Africa, we might ask, how do these 12.4 million jobless South Africans survive, feed their families, or prospect for a decent life? In fact, lack of adequate nutritious food affects more than 63% of households, with more than one in every four children under five stunted by malnutrition.

How then do the unemployed face inequality, daily witnessing white, black, middle- or upper-class privilege in stark contrast to deprivation? With structural unemployment so deep, and an economy in the past 15 years achieving just 1% economic growth rates, there has been little reason for job seekers to have any hope.

This is why YES, and the Presidential Employment Initiative, which has created more than 1.5 million work and livelihood support opportunities since 2020, represent hope – because we provide a slim pathway, the narrowest window, into the economy for jobless youth. Increasing economic growth and jobs is, therefore, now the central imperative for this Government of National Unity (GNU) and a key measure of its success, or failure. As President Ramaphosa said, “economic growth lies at the heart of everything else that we seek to achieve as a society”.

Economists largely agree that an annual rate of 3% economic growth is the minimum requirement to absorb the half million net new entrants annually into the economy.

So, if we undershoot that rate, we must expect unemployment to increase further. Yet, current economic forecasts as an average of the SARB, National Treasury, IMF and private sector economists, suggest economic growth rates of 1.1%, 1.6% and 1.8% this year, 2025 and 2026 respectively.

These forecasts incorporate global and domestic easing in financial conditions, improved sentiment since the elections, tentative green shoots in our economy, the suspension of load shedding and early signs of a logistics complex turnaround, all reflected in improved asset prices.

Some say we are “on the cusp of a cyclical upswing”. But this consensus economic growth forecast tells us our base case must be to expect growth to remain wholly insufficient to arrest the increase in unemployment. It is clear that we need a pivot in economic strategy, to achieve a quantum leap in our economic growth prospects and creation of jobs.

At the heart of our past economic challenges lie the crippling effects of State Capture across state institutions; tight monetary conditions, albeit well managed by the SARB; and the tight-fisted fiscal policy of the National Treasury, whose toolkit centres on cutting public spending. The effect has been to choke the South African economy, causing it to be caught in a multiyear economic growth trap of 1%.

This fiscal strategy, aiming to contain our debt, while resisting economic stimulus, had the opposite of the desired effect on our debt/GDP ratio; with poor growth, our dollar GDP stagnated at 2011 levels, and our debt/GDP ratio more than doubled from 33% in 2011, to 74.6% now.

What can then be done to accelerate improved economic outcomes for our nation?

I suggest four main areas of focus.

First — the work of Operation Vulindlela, a joint initiative of the Presidency and National Treasury, and business to mobilise focus, skills and resources, and accelerate structural reforms related to energy, transport and crime, is a huge positive.

But it must be recognised that the success of this government–business partnership and associated reforms, is a necessary, but insufficient condition for achieving our required minimum 3% economic growth rate. Partly, business and government need to “put our money where our mouth is”, lean into fixed capital expenditure and reverse the decade-long decline in the growth of fixed investment.

Still, more is needed. We must accept it is neither advisable to grow the fiscal envelope, nor possible to increase VAT, corporate or personal income tax brackets to expand revenue. We also accept there are growing demands, inter alia, to fund police, teachers, nurses, infrastructure and social grants (which are a critical buffer to starvation).

Second — a huge exercise to reprioritise budget expenditure, using zero-based budgeting, is urgent. We must revisit the government’s national budget allocations, lower consumptive expenditure on salaries and administration, and find space to fund productive investment in industry, small businesses and infrastructure.

This reprioritisation may result in less spending in some areas, and more in others, where fiscal and social multipliers are highest (for example, investing in SARS to drive tax revenue, the NPA to prosecute corruption, social grants, public investment in infrastructure, grants for micro enterprises, etc).

We must cut back on wasteful, corrupt and irregular expenditure, and introduce performance management, to extract “bang for buck” from spending.

We must ask hard questions if programmes, which receive billions, are value for taxpayer’s money, should be restructured, or eliminated.

We must re-examine our tax incentives, and rebate structure, which benefit the middle classes, to instead fund programmes like public health for the poor.

Setting the income levels above which benefits such as tax rebates are lost will need to be carefully negotiated, but sacrifices will need to be made by some, in the interests of driving higher growth outcomes for all.

When 55,000 public sector employees, 80% more than a decade ago, each earn over R1-million per year; when the government wage bill is R724-billion, yet aggregate outputs are poor, a comprehensive restructuring of the public service is needed.

Some think a large, once-off voluntary retrenchment package for high-paid employees, may generate savings that can be recycled into funding more frontline teachers, nurses, police and administrators. A significant reduction in the size of the Cabinet, almost twice the size of the 1994 GNU Cabinet, is certainly needed.

Third — industrial policy. It is important to provide space for budget expenditure on industrial incentives to support economic investment, exports and productivity.

Earlier this year, as Adjunct Professor in the economics department at Columbia Business School, I was exposed to a vibrant debate in the United States, where factories are being built with the help of federal aid, regarding industrial policy, backed by strong fiscal stimulus, to reinvigorate manufacturing and jobs.

South Africa is not America, but we should interrogate our industrial policy, applying improved policies to ensure a level and competitive playing field for South African businesses. Whether imposing selective tariffs on imports, thereby making local production more competitive, or making grants, tax credits, subsidies and/or apprenticeships available to invest in advanced technologies, strategic mineral processing, agriculture, local manufacturing or clean energy; better policy can boost industry.

Factors such as labour regulation (for instance, allowing continuous 24/7, three-shift production), training subsidies to support improved productivity growth among the workforce, cost of services, crime and infrastructure influence manufacturing investment. We must leave no stone unturned.

Fourth — this industrial policy pivot will encourage foreign investors to reconsider South Africa as a foreign direct investment destination. Government must understand that investment conferences and overseas roadshows do not translate into new fixed investment.

It is rather the hard work of engaging the world’s largest corporations, one by one, with the objective of dynamically engaging on what package of policies and incentives can entice them into large, fixed investments in our economy, that will each add the desired billions of dollars, and thousands of jobs into the mix.

These are some of the hard choices we must confront to reinvigorate our economic prospects. Make no mistake, these reforms will take the political courage and magic of Mandela, the management skills of Mbeki and the wisdom of Motlanthe.