Constructive: Workers build a road through Ficksburg’s township in the Free State. Infrastructure spending has a fiscal multiplier of 2.7, so a budget should not limit spending. Photo: Herman Verwey/ City Press/Gallo Images
In October 2020, President Cyril Ramaphosa convened a joint sitting of parliament to announce an economic reconstruction and recovery plan. He said the government had previously announced a relief package worth R500-billion, or 10% of GDP, which was the biggest in the African continent and compared with other countries in the G20.
“I want to focus on the extraordinary measures we must take to restore the economy to inclusive growth following the devastation caused by Covid-19 to our people’s lives and the country’s economy,” he said.
After a “lost decade” between 2009 and 2019, during which GDP per capita did not grow, South Africa’s response to the pandemic-induced recession was inadequate. The government has repeatedly lied about the size of its relief package and has provided no recovery plan for a battered economy, which had 12.3-million people who do not work and an unemployment rate of 44.1% during the second quarter of 2022. The country is heading for a second “lost decade” between 2020 and 2030.
World stimulus packages in the wake of the pandemic were worth $16-trillion, or 17% of world GDP, according to the International Monetary Fund (IMF). The direct state contribution to these packages — additional spending and foregone revenue — was $10-trillion, or 10.6% of world GDP. If one looks through the smoke and mirrors of South Africa’s package, the real stimulus — new money injected into the economy — was R104.1-billion. This was equivalent to 1.6% of GDP in 2020-21.
There were two components of the real stimulus. The direct state contribution was R27-billion, equivalent to 0.5% of GDP. There was a R19.7-billion increase in non-interest spending during 2020-21 compared with what had been previously budgeted. Direct tax relief was R7.3‑billion. There were off-budget measures of R77.1-billion. They comprised: R18.4-billion that banks advanced to clients as part of a failed R200-billion loan guarantee scheme and R58.7-billion that the Unemployment Insurance Fund paid to people who were unemployed because of the Covid lockdown.
Unemployment is a macroeconomic policy issue that we cannot address through microeconomic (or structural) reforms. Ramaphosa’s “recovery plan” did not have a single macroeconomic policy tool. It had two interrelated pillars. First, in September 2018, he had announced a R400-billion infrastructure fund. But the treasury cancelled the fund. In the February 2019 budget, the treasury said the fund would mobilise R100-billion over the next decade. Every year since 2019, the treasury has made an allocation to the fund, which was subsequently cancelled.
In the 2022 medium term budget policy statement this week the government cancelled a R4.2‑billion allocation that was made in February. The fund has no money four years after it was launched.
FirstRand chairperson Roger Jardine writes in the group’s latest annual report: “It is hard to identify one government-led project of any significance that has actually been executed.”
The IMF says infrastructure spending has a fiscal multiplier — the additional GDP growth generated by each dollar of new spending — of 2.7 times. Because it generates the income to more than pay for itself, it makes no sense to have a budget constraint for public spending on infrastructure. Many economists believe that such spending should be excluded from budget deficit calculations.
Second, the plan has pinned its hopes on structural reforms to unleash an improbable new wave of private sector investment. Structural reform is code for privatisation, deregulation, liberalisation and the withdrawal of the state from network industries — electricity, transport, telecommunications and water. But numerous studies by the treasury, the IMF, and many others show that such reforms have a negative impact on GDP growth in the short term and marginal benefits in the long term.
South Africa had an investment ratio of about 13% of GDP in 2021, the lowest since it started collecting national statistics in 1946. The annual shortfall to achieve the 30% target in the National Development Plan is more than R1-trillion. The 2022 budget allocated R812.5-billion towards infrastructure during the three-year period until 2024-25. This was equivalent to an annual average of 4% of GDP during the period. The medium-term budget made no additional allocation. The annual shortfall to achieve the NDP’s target for public investment of 10% of GDP is R400-billion.
In his 2020 speech to parliament, Ramaphosa said the plan “would bring about 11 800 megawatts of new generation capacity into the system by 2022. More than half of this energy will be generated from renewable sources.” But the reality is that there is almost no new capacity that has been added to the grid from projects that were initiated since Ramaphosa became president in February 2018. The medium-term budget says 14 gigawatts of new power will be added to the grid over the next two years. No one believes this will happen.
If one adds all the investment that is supposed to flow from the structural reforms, it becomes clear that they are not gamechangers for the economy. They will close less than 5% of the country’s annual investment shortfall. But the flagship energy reforms have barely got off the ground. For example, the government has only closed projects worth 420MW for the fifth bid window of the renewable energy independent power producer procurement programme. By 22 August, the National Energy Regulator of South Africa had registered 626 generation facilities that have a capacity of 714MW.
The medium-term budget showed the government does not believe that its own recovery plan will not deliver higher GDP growth. From 2023 to 2025, the treasury has forecast an annual average GDP growth rate of 1.6%. The government is on a dangerous development path that will result in higher rates of unemployment.
The only way out of the crisis is for the government to ditch the austerity budget and use macroeconomic policy tools, including higher government spending, to grow the economy.
[/membership]