The Government of National Unity must maintain the line of public spending

In this series for Daily Maverick, Center for Development and Entrepreneurship (CDE) Executive Director Ann Bernstein makes the case for a policy agenda that is significantly different from anything we have seen in the past 15 years.

This is taken from Agenda 2024: Priorities for the new South African government, which builds on CDE’s extensive policy work and recent collaboration with experts, business leaders, former government officials and others in our society. The project aims to answer the most important question facing South Africa: what can the 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 involvement in solving 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 a potential realignment of politics into two competing camps, around which parties committed to the Constitution and those opposed to the rule of law are united. And all signs in heaven and earth indicate that – at least for now – the constitutionalists in government have triumphed over the extremists in opposition.

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

His opening speech gave every indication that President Ramaphosa was optimistic about reform. Faced with (somewhat muted) cheers from the opposition benches, he promised to “put inclusive growth at the top of the national agenda” and “manage public finances to stabilise debt”.

We’ve heard these statements before, of course. But this time, in a new political context, there’s renewed hope that he’ll keep his promises. If South Africa is to survive – and one day thrive – it’s imperative that he does so.

Years of large structural differences between government revenues and expenditures have reversed the fiscal progress made in the first 15 years of democracy. The country is now in a much worse position than at the beginning of the democratic era.

South Africa’s public debt to GDP ratio fell from 50% in 1994 to 24% in 2008, but has now risen to 74%. South Africa’s situation is much closer to that of an insolvent company than one with merely cash flow problems.

While there is no magic bullet to solve the fiscal crisis, GNU can make significant progress in two dimensions that would be extremely helpful: driving faster economic growth and improving the quality of spending. Importantly, these two priorities work together and reinforce each other.

There is ample evidence that government spending is deeply inefficient. This evidence includes the poor performance of key institutions, from our schools and hospitals to our police and courts; from the inefficiency and disorder in our home affairs offices to the lack of maintenance of our railways and power stations.

Much of the problem is managerial in nature, with misuse of limited resources resulting from staff deployment and breakdown of accountability systems.

Improving the quality of spending also means fixing the procurement system. It is clear that where procurement budgets have not been stolen, the emphasis on meeting a wide range of transformational goals has led government agencies to overpay (often grossly) and underpay (literally) for goods, services and infrastructure.

Fixing public procurement, which costs hundreds of billions of rand, requires re-prioritising procurement spending to focus more on the operational needs of spending agencies and ensuring optimal value for money.

The GNU must stick to its current fiscal strategy, which is generally sound. But it must be strengthened and understood as an immediate and ongoing commitment to fiscal stability during the seventh administration and beyond.

Going forward, the GNU must refrain from making unsustainable new spending commitments, and one of the goals of the programme is to avoid agreements that cause public sector wages to rise faster than the economy grows.

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

Decision-making at the center of government needs significant improvement. This will require streamlining the office of the president and ensuring that we have the right people appointed to mission-critical positions (such as CEOs and other senior officials in government departments, as well as chairmen and CEOs of state-owned companies and other public entities).

To achieve better value for money, the GNU should take a serious look at inefficient public procurement, establish productivity commissions that will find practical ways to increase service delivery within current budget constraints, and maximise government revenues by enforcing tax obligations more effectively against tax defaulters.

Finally, it must be recognized that local governments across the country, with a few exceptions, are in crisis. Each year, about 10 percent of the state budget is transferred to municipalities and metros, and there is almost universal agreement that this money is not spent efficiently. The president should urgently appoint a high-level team of experts to revisit 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 for deepening and broadening the reform agenda will not go far: the most effective way to improve fiscal sustainability is through economic growth. The impact of growth on fiscal stability is immediate, because certainty about the future is almost as important as electricity for powering investment.

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

These actions would instill greater confidence in the future and free up a significant portion of the outstanding business spending on maintenance and investment. This is money that has not been invested in recent years precisely because of the terrible management records of previous administrations and their lack of credibility to drive meaningful reform.

A clear and credible commitment to fiscal sustainability is clearly part of this, but crucially, 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 it needs; a government that can credibly commit to sustainability will find that growth “comes naturally,” which makes achieving sustainability much, much easier. This is ultimately why achieving fiscal sustainability is so important: without it, growth will never accelerate significantly.

Broadly speaking, the current fiscal strategy is on the right track. The GNU needs to hold the line and ensure that its words translate into action. At this critical juncture, it is crucial to resist populist pressure to deviate from this path – whether in the form of excessive public sector wage growth, a basic income subsidy, or any of the myriad other spending increases that are sure to be put forward.

The key point is that unless all economic actors believe that public finances will be brought to a sustainable level, there is no way that investment will reach the levels needed to generate faster growth. There is no trade-off between sustainable fiscal policy and growth: each is a prerequisite for the other. Therefore, acting more quickly to achieve fiscal sustainability is crucial. DM

Ann Bernstein is the executive director of CDE. Report, Action Three: Fixing the Fiscal Crisisis available on CDE website.