When Finance Minister Tito Mboweni presented the medium-term budget policy statement on 28 October, he didn’t acknowledge the depth of the crisis we are in or offer a way out of it. New ideas and bold action are urgently needed to address the slowdown in the economy, excessive government debt and the crises of poverty and inequality.
Mboweni said: “We are today fiscally at a moment not too dissimilar to 1994” when we had to deal with “the devastation visited upon our public finances by the apartheid regime”. Actually, we are in a far more severe fiscal crisis now and we do not have the same good will and opportunities of that post-apartheid moment. In 1994 government debt was 46% of a year’s gross domestic product (GDP). That was reduced to 26% by 2009. Government debt is now at 81.8% of GDP. This matters because the larger our debt is in relation to the size of all our economic activity (which is what the GDP measures), the harder it will be to pay that debt. And the more we spend on paying loans and interest on them, the less there is to spend on items such as education and infrastructure that can position our country better for the future.
Mboweni referred to 15 post-1994 years of “unmatched social progress”, when the GDP rose by 61%. He overlooked that the growth was not evenly shared; neoliberal policies and integration into the global economy resulted in increasing inequality. The World Inequality Database (wid.world) shows that the richest 1% in South Africa more than doubled their share of national income from 10% to over 20%. The richest 10% got 46% in 1994 and now they take 65%. The share of national income that the poorest 50% of our people get fell from 15.6% to just 6.3%.
The richest 10% own more than 85% of all private wealth, while the bottom 50% hold a negative 2.5%. The poorest half of the population have no assets and some regarded as the middle class have more debts than assets. The top 1% own 55% of all wealth and the share held by the richest 0.1% climbed from about 19% in 1994 to close to 30% today.
The negative effects of these extreme inequalities are felt less while the economy is growing, but when it slows the effects are real and hit the poorest hardest. It’s a recipe for political and social polarisation and conflict. Since 2009 there has been no real growth in per person GDP. Statistics South Africa found 56% of people were living in poverty in 2017. According to the World State of Food and Nutrition Security report, more than half of all people (51.8%) experienced severe or moderate food insecurity in 2018. Decades of progress have been reversed in the past eight years or so, as seen in the increasing number of people who are food insecure and the proportion of children (27.4%) who are stunted. We were in a deep crisis before the Covid-19 pandemic made matters far worse.
Mboweni said the high level of government borrowing — rising at R2.1-billion a day — cannot continue. Surprisingly he then outlined plans for the government debt of just under R4-trillion to increase to more than R5.5-trillion by 2024, at which point it will be about 95% of GDP. Servicing such a debt results in the government redistributing wealth from the poor to the rich as they suck up money in tax paid by us all and give it to the owners of capital who they borrow from. In the coming three years, debt servicing costs will increase by 16.1% and non-debt expenditure will grow by only 0.9%. In real terms (taking account of inflation) government spending will drop substantially, meaning less interventions to address poverty and inequality. Meanwhile, GDP is projected to grow at just 3.3%, 1.7% and 1.5% a year over the coming three years. This doesn’t even cover the 7.8% contraction projected for 2020 leaving the economy smaller in 2023 than it was in 2019.
All this is Mboweni’s best case scenario if the government sticks to the plans, something they have a poor track record of doing. Worse, nothing was said about inequality. It is clear that the plan will result in the rich getting an even bigger share of a smaller pie, while leaving more people in even deeper poverty. We have to do better than this. Looking at what has been done before to address such fiscal crises is a good place to start.
The 2018 World Inequality Report provides useful information on how countries like France and Germany got out of their post-war debt trap. Germany reduced government debt from 183% of GDP in 1945 to just 22% in 1953. France took just six years to reduce its 1945
debt to GDP ratio of 168% to 33%. Both countries did this with a combination of three interventions:
1) Progressive wealth taxes on private capital;
2) Debt relief; and
3) High inflation rates.
Any onerous debts should be written-off, but it is hard to say more on that without details of specific debts. I will elaborate on the wealth tax and inflation options.
Post-war France imposed a progressive special wealth tax of up to 25% on private capital. If ever there was a time to impose a wealth tax, it was at the end of apartheid in South Africa. That opportunity has gone, but after the Covid-19 crisis and with even greater inequality, a wealth tax is perhaps more justified and needed today. Total private wealth is about R10.6-trillion, excluding assets held offshore. A once-off 25% tax on the richest 10%, with their 85% share of the wealth, would not touch 90% of the population, but would
cover well over half the government debt. A 25% wealth tax on only the richest 1% could net R1.45-trillion reducing the government debt by more than a third.
This would also put the government in a far better moral position to negotiate for needed civil service wage cuts. Many would be more willing to accept austerity measures knowing the richest, including beneficiaries of apartheid and corruption, are paying up.
We are told that the 3% to 6% inflation target is for stability and to protect the poor. Less often explained is how low inflation protects capital and the wealth of those who own it. A loan, if serviced, stays at a fixed amount and even if interest rates rise the capital amount doesn’t. With inflation the loan becomes smaller in relation to the GDP, expenses and incomes that rise with inflation. And inflation does not hurt our buying power as long as our incomes increase with it.
An inflation rate of 25% would reduce government debt (currently 81.8% of GDP) to just 27% of GDP in five years, even if we make no capital payments and with no real GDP growth. South Africa is well positioned to benefit for several reasons:
1) This will reduce our high inequality and personal as well as government debt, especially as such a small elite hold most of the capital that will depreciate in relative value;
2) Most government debt is owned by national capital so this will reduce the negative effect from the likely currency depreciation; and
3) The grant system enables the government to reduce negative effects on the poorest through increasing grants in line with inflation. Workers can also be protected from some harm by adjusting tax brackets upwards.
The relaxation of monetary policy, needed to move us to a higher inflation level, would bring an added benefit of stimulating the economy. The inevitable decline in the rand’s value will hurt some, but will make our exports more competitive. If combined with protection from low cost imports, justified by the crisis situation, and other measures it will be an opportunity to increase local production and manufacturing.
Economic policy is complex — every action sets off a range of reactions — but the path set out by Mboweni is taking us into a deeper crisis. All possible economic policy tools need to be used in a coordinated way to urgently reduce debt and address poverty and inequality. We should at least seriously consider a special wealth tax and a higher inflation target for the coming five years. These interventions must be accompanied by many more, including measures to prevent hard won fiscal space being squandered again on corrupt and wasteful
expenditure. The pre-Covid-19 economic path that enriched a few and left an increasingly large majority in poverty is not an option.