/ 2 November 2023

Mini-budget raises questions about SA’s growth prospects

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Finance Minister Enoch Godongwana. Photo: Dwayne Senior/Bloomberg via Getty Images

Finance Minister Enoch Godongwana’s 2023 medium-term budget policy statement (MTBPS) takes another stab at what some have deemed implausible: growing the economy amid constrained spending.

During an interview with the Mail & Guardian, Godongwana — who earlier remarked that he has earned the moniker “Mr Austerity” — defended the treasury’s stance on growth.

He cited Harvard economist Ricardo Hausmann, whose 2022 paper linked South Africa’s anaemic growth to bad microeconomic policy. “He says most South Africans tend to live at the macro level, because it is ideologically nice to be there. The problem is, they forget the micro level,” the minister said.

“Whatever macroeconomic policy you can pursue, in the absence of electricity, logistics, crime and state capacity, you’re doomed.”

Godongwana noted that most countries recovered after the 2008 global financial crisis. “But South Africa has not recovered because there is a core relation, in my view, between that period and electricity outages. And that has had an impact on growth levels.”

The minister added that the country’s revenue shortfall is largely a result of lower gains by the mining industry, suggesting that beleaguered state rail operator Transnet is to blame. “Your fiscal space is constrained because of those logistics constraints,” Godongwana said.

In the lead-up to Godongwana’s speech on Wednesday, a number of commentators pointed to South Africa’s growth crisis as being at the heart of the country’s fiscal predicament. 

But they were divided on whether this much-needed growth would come from fixing supply-side challenges — such as an ailing Transnet and Eskom — or by stimulating demand among pinched consumers through expansionary spending. 

The Institute for Economic Justice, for example, pointed out that South Africa does not have a fiscal crisis, but a growth crisis, as well as a social crisis. Labour federation Cosatu gave its own version, remarking that the country doesn’t have a fiscal crisis, but a Transnet crisis.

Ultimately the treasury doubled down on its view that higher public spending does little to grow the economy. The section of the MTBPS focusing on South Africa’s economic outlook led with the consequences of inadequate electricity supply and rail capacity, while underlining the government’s macroeconomic framework, which includes prudent fiscal policy, inflation targeting and a flexible exchange rate.

The treasury forecast that South Africa’s economy will grow at an average rate of 1.4% from 2024 to 2026, well below what is needed to bring down the country’s ultra-high unemployment rate. 

The MTBPS noted that this projection is lower than that contained in the February budget, mainly as a result of lower household consumption expenditure caused by higher inflation and interest rates as well as lower net exports. 

The treasury’s longer-term growth trend of 2.1% appears to be informed by progress on structural reforms, such as establishing a framework for public-private partnerships and widening scope for concessional borrowing for infrastructure projects.

The treasury’s growth forecasts give reason for pause, something that was reflected in some post-MTBPS analyses. 

Nedbank’s economists noted that the policy statement proposes significant spending restraint, but said “the core problem is economic stagnation”. Cosatu called the policy statement “lacklustre”, noting: “We will not emerge from our crises if we continue to stumble along a path of 0.9% and 1.4% GDP growth.”

Notably, the policy statement made no mention of granting a cash injection to Transnet, something the entity’s board has emphasised the need for to turn it around. Responding to questions about Transnet during a press briefing, Godongwana and his director general, Duncan Pieterse, suggested they would need to see progress before making any new spending commitments.

The treasury’s assistance to state-owned entities (SOEs) will see them having to adhere to strict conditions. 

Speaking to the M&G shortly after Godongwana’s speech, Asghar Adelzadeh, director and chief economic modeller at Applied Development Research Solutions, made note of the treasury’s low growth projections.

“You’ve got this dichotomy going on. On the one hand telling the public that there is very little growth in the economy — given the implementation of the policies, not in absence of the policies — and then on the other hand telling the public that what is being prescribed is going to help economic growth. So I think there is a contradiction there,” he said.

The treasury has failed to show how its strategy will affect unemployment, a fundamental concern of macroeconomic policy, Adelzadeh noted.

He added that the notion that growth will only come through microeconomic measures is flawed. “It’s not giving results. It is not providing growth. It is actually grinding the economy down … The treasury has become all about microeconomics, while we have huge departments on transportation, on SOEs, with senior ministers in charge of logistics and others. The treasury needs to focus on macroeconomic performance — growth, employment through a mix of monetary and fiscal policy.

“That’s been put aside, leaving the treasury to talk about water, electricity, logistics. There are huge departments in charge of these.”