A fiscal crisis and a fork in the road
Two concepts that have crept into our discussions will probably dominate political discussion over the next decade. The one is the fiscal cliff and the other regime change. Both are drawn from the political debate in the United States. Over the past decade commentators have often used the term fiscal cliff with reference to the enormous national debt and in the inability of the political class to address it.
The term regime change is often applied to a violent change in the form of rule, like the toppling of Saddam Hussein by a US armed force; however, far reaching change can also be brought about peacefully. It usually happens after a government has shown that it is not capable of addressing a major political or economic crisis and suffers from administrative paralysis. A good example is the establishment of the Fifth Republic in France in 1958 after a new constitution had been crafted by General Charles de Gaulle.
In South Africa the refusal of the government of General J.B.H. Hertzog to leave the gold standard exacerbated the profound economic crisis of the early 1930's. It prompted General Jan Smuts, leader of the Opposition, to state that the nation's condition was like that of a wounded man whose lifeblood was ebbing away. South Africa, he said, was doomed to inevitable and sure destruction.
The United Party, formed in 1933 out of the parties of Hertzog and Smuts, represented a regime change. In place of a government resting on an Afrikaner base consisting, outside the Western Cape, mainly of struggling farmers and blue collar workers the new regime drew on those sectors of society that paid the most taxes. The mining, manufacturing and commercial sectors now had a much more direct influence on government than was the case under a NP government. The realignment formed the base for a growth phase averaging just under 5% from 1933 to 1973.
The economic crisis of the 1980s led to the regime change of the early 1990s and the coming to power of the African National Congress, based predominantly on lower income black groups. But the system was still unbalanced. Before the regime of 1994 the largest part of the labour force was not represented in government; after 1994 the sectors that paid the most taxes, as individuals or as owner or managers of companies, were not represented in cabinet.
As invariably happens, the interests of those excluded from power are rarely properly taken into account. The protest against e-tolling in Johannesburg looks like the first tax revolt in which the white middle class is participating enthusiastically. A few years ago The Economist warned that the governments of both Nigeria and South Africa have Achilles heels. In the former case it is oil and the latter case it is the white taxpayer.
The euphoria over South Africa's world class constitution has faded. At the same time it has become increasingly clear that we are saddled with a political and electoral system that is ill-suited for a deeply divided society. White domination has been replaced by black domination as Donald Horowitz, probably the world's leading authority on constitution-making in deeply divided societies, warned in the early 1990s would happen.
Prof. Vernon Bogdanor, Professor of Government at Oxford University, has observed that a form of power-sharing is a characteristic of all societies that have succeeded in overcoming their divisions and prospered. He added: "I am not aware of any divided society that has been able to achieve stability without power-sharing."
The government's capacity to tackle looming economic and financial problems effectively has been hamstrung by the battle between the ANC's factions which thwart any consensus and decisive action.
Recently heads of several major corporations listed on the JSE asked the Minister of Finance and the Governor of the Reserve Bank for an off-the-record discussion about the economy. No meaningful discussion could take place however because the government's cluster of economic departments were deeply divided between proponents of the free market and old-style communism. As someone remarked: "At present there simply is no economic policy for the country."
Some leaders in the corporate world are trying hard to persuade ministers on an individual basis of the need for policies to promote growth and employment. There are occasions when they succeed in bringing an individual minister around to their point of view but often this is followed by a lack of execution.
After the brief period of the Government of National Unity I asked Mr. F.W. de Klerk about what the main differences were between the NP and the ANC government with respect to the decision-making process. His reply was: "Before 1994 a delegation could persuade a NP cabinet minister of the need for a policy change. If the minister had a sufficiently strong base in the party he was able to assure the delegation that he could carry the cabinet." De Klerk's impression was that under the ANC a controversial issue got debated in one forum after another in an often futile effort to achieve agreement among the various factions.
The policy gridlock has been accompanied by a growing state sector taking an ever larger share of the revenue. This development has been brought into sharp focus by an article in the Tydskrif vir Geesteswetenskappe by Prof. Jannie Rossouw. Head of the Economics and Business Science department at the University of Witwatersrand, and two co-authors Adele Breytenbach and Fanie Joubert. Previously Rossouw was attached to the Reserve Bank for 27 years.
Their work shows that over the past decade employment in the central and provincial governments grew by 27%. The total employment bill meanwhile increased by 145% against an accumulated inflation effect of 54%. At present the sum expended on salaries and social welfare is equal to 56% of the state's revenue. If the trends of the past decades continue these two items on the budget will absorb all the state's revenue by 2026.
There are signs that the Minister of Finance is desperately trying to apply the brakes. But is this government capable of living within its means? In particular, can it persuade civil servants that the party is over? In recent years governments in several countries have found it exceptionally difficult to cut public sector salaries or just to persuade public servants to accept inflation-related increases. At the same time there is little indication that the dependence of sixteen million people on social grants can be turned around. Reports from the previous homelands indicate that fewer people are sowing and planting even on a modest scale.
As was the case before the regime changes of 1933 and 1994 those shouldering the largest part of the tax burden are in a foul mood. They get pretty little in return for their tax money. As in 1933 and 1994 a government in which all the interest groups are represented may be necessary to provide a large enough base to see off the economic and fiscal crisis heading our way.
Should the government find it impossible to do this it may eventually have to go cap in hand to the World Bank and IMF for funds. It is unlikely that a loan will be given without very strict conditions, including a severe reduction in the public sector salary bill and in social grants. Inevitably this will trigger a major schism in the ANC between those resigned to the inevitability of foreign loans and those demanding even higher taxes.
The development will put stability in South Africa before a severe test. It would be better if South Africans of all persuasions start debating how the fiscal cliff can be avoided well before the country arrives at that point.
Hermann Giliomee is a historian who lives in Stellenbosch
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