6 August 2024

In this series, executive director of the Centre for Development and Enterprise (CDE), Ann Bernstein, makes the case for a policy agenda that is substantially different from what we have seen over the past 15 years.

It is drawn from Agenda 2024: Priorities for South Africa’s new government, which is based on CDE’s extensive policy work and recent collaboration with experts, business leaders, former public servants and others across our society. The project sets out to answer the most important question facing South Africa: what can a new government do to get the country back on track after 15 years of stagnation and decline? 

The fourth article in the series recommends ways to strengthen government’s commitment to fixing the crisis in our public finances. Read Part One here, Part Two here and Part Three here.

The formation of the Government of National Unity (GNU) is a step towards the potential realignment of politics into two competing camps around which parties committed to the Constitution, and those who oppose the rule of law, coalesce. And all the signs are that – at least for now – the constitutionalists in government have won out against the extremists in opposition.

This is good news for South Africa’s constitutional order and its growth prospects. It means that a strengthened President Cyril Ramaphosa can deepen his reform agenda with the support he needs in a GNU Cabinet to go further and faster than he has before.

His address at the opening of Parliament offered every indication that President Ramaphosa is feeling bullish about reform. In the face of (somewhat muted) howls from the opposition benches, he promised to “place inclusive economic growth at the top of the national agenda” and to “manage public finances with a view to stabilising debt”.

Of course, we have heard these pronouncements before. But this time, in a new political context, there is renewed hope that he will make good on his promises. If South Africa is to survive – and one day thrive – it is imperative that he does.

Years of large structural gaps between government’s revenues and its spending have wiped out the fiscal progress achieved in the first 15 years of democracy, and the country is now in a much worse position than at the start of the democratic era.

South Africa’s debt to GDP ratio declined from 50% in 1994 to 24% in 2008, but has now risen to 74%. South Africa’s position is much closer to that of a business that is insolvent than one that is merely experiencing cash flow problems.

While there are no magic bullets for resolving the fiscal crisis, the GNU can make meaningful progress along two dimensions that would help enormously: pursue faster economic growth and improve the quality of spending. Importantly, these two priorities interact with and reinforce each other.

There is abundant evidence that government spending is deeply inefficient. Such evidence includes the poor performance of critical institutions from our schools and hospitals to our police and courts; from the inefficiency and disarray in our Home Affairs’ offices to the lack of maintenance of railway and power stations.

Much of the problem here is managerial in nature, and the misuse of scarce resources is rooted in cadre deployment and the breakdown of systems of accountability.

Improving the quality of spending also means fixing the procurement system. It is clear that where procurement budgets have not been looted, the emphasis put on meeting a wide range of transformation targets has led government agencies to overspend (often grossly) and underdeliver (an understatement) on goods, services and infrastructure.

Fixing state procurement, which involves hundreds of billions of rand, requires a reconfiguration of the priorities of procurement spending that focuses much more on the operational needs of the agencies spending money and securing value for money.

The GNU needs to stick with the current fiscal strategy, which is broadly right. However it should be strengthened and needs to be understood as an immediate and ongoing commitment to fiscal sustainability throughout the seventh administration and beyond.

Moving forward, the GNU must refrain from making any new unaffordable spending commitments, a goal that includes avoiding agreements that raise public sector remuneration spending faster than the economy is growing.

The government should improve the quality and productivity of spending by focusing on core business, eliminating low-productivity activities. This is a process that should be led by Operation Vulindlela.

Decision-making at the centre of government needs considerable improvement. This will require streamlining the Presidency, and ensuring that we have the right people appointed in mission-critical jobs (such as directors-general and other senior officials in government departments, as well as chairpersons and CEOs of state-owned companies and other public entities).

To achieve greater value for money, the GNU should take a serious look at inefficiencies in government procurement, institute productivity commissions to identify practical ways to increase service delivery within current budget limits, and maximise revenue collection by doing more to enforce tax obligations on those who are evading their responsibilities.

Finally, it needs to be recognised that local governments across the country – with a few exceptions – are in crisis. Every year some 10% of the national budget is transferred to municipalities and metros, and there is almost universal consensus that this money is not being spent effectively. The President should urgently appoint a high-level expert task team to relook at the structure and financing of this sphere of government with recommendations for action to be discussed in Parliament within six to eight months.

These and other recommendations to deepen and extend the reform agenda will only go so far: the most powerful way to improve the sustainability of the public finances is through economic growth. The effect of growth on fiscal sustainability is instantaneous because confidence in the future is almost as important as electricity for powering investment.

In our circumstances, achieving faster growth is not actually all that hard. It requires a government that is credibly committed to addressing the enormous governance deficiencies that exist – to cleaning up procurement, sending corrupt officials to jail and demanding higher standards from public servants.

These actions would instil greater confidence in the future and unlock a great deal of pent-up business spending on maintenance and investment. This is money that has not been invested in recent years precisely because of the abysmal governance record of previous administrations and their lack of credibility as a force for meaningful reform.

A clear and credible commitment to sustainability in public finances is clearly part of this, but, critically, it is also self-fulfilling: a government that cannot credibly commit to sustainability cannot convince the private sector to invest and will not get the growth needed; a government that can credibly commit to sustainability will find that growth happens “naturally”, making the achievement of sustainability much, much easier. This, ultimately, is the reason achieving fiscal sustainability is so important: in its absence, growth will never accelerate significantly.

Broadly speaking, the current fiscal strategy is on the right track. The GNU must hold the line and ensure that its words translate into action. It is vital at this critical juncture to resist populist pressure to deviate from this path – whether in the form of excessive growth in public sector pay, or a basic income grant, or any of the myriad other proposals for increased spending that are bound to be made.

The essential point is that, unless all economic actors believe that the public finances are going to be put on a sustainable footing, there is no way that levels of investment will reach the heights needed to generate faster growth. There is no trade-off between sustainable fiscal policy and growth: each is a precondition of the other. This is why moving more quickly to achieve fiscal sustainability is vital. DM

Ann Bernstein is executive director of CDE. The report, Action Three: Fix the Fiscal Crisis, is available on the CDE website.

This article first appeared on Daily Maverick.