/ 29 September 2023

The fiscus will shade the elections

Graphic Tl Calland Fiscal Website 1000px
(Graphic:John McCann/M&G)

The fiscus is inherently political. As one definition of politics neatly puts it, “Politics is the process by which decisions about the allocation of resources are made”. The choices a government makes in its budget processes — whom to tax, what to fund — are not “technical”; there are winners and losers, and ideology will rightly play a big part in the decision-making. 

Now, in South Africa, the fiscus has become an electoral issue.

The choices that the treasury and the minister of finance, Enoch Godongwana, makes in the medium term budget policy statement on 1  November, and the budget in February, are likely to have a significant bearing on next year’s election.

They may even determine whether the ANC retains its majority, given how tight the 2024 poll is likely to be. And from a purely ANC perspective, there are no good options. 

The stakes were raised by the treasury with a dramatic letter that was sent across government on 31 August, instructing departments and public agencies to, in effect, freeze recruitment, halt travel and workshops and the like. Even though it had been foretold, it caused shock — even panic — in the public sector, leading to various “clarifications” to have to be subsequently issued. 

The accusation from the left is that this is “austerity” — a swear word in progressive political circles — on steroids, and that it will do more harm than good. But as a former senior treasury official, Michael Sachs, has pointed out, South Africa’s fiscal predicament is not a result of governmental decisions to reduce public expenditure, but because of diminished real growth since 2012. 

The August Letter was the moment when South Africa’s chickens finally came to roost; the economic damage caused by the state capture years, the steady erosion of government capacity and capability, and in trust in public institutions, have brought the country to where it is. 

Lack of growth as a symptom of weak economic performance is the outcome. If you have less money, in real terms (net of inflation), then you have less money to spend — unless you are willing to borrow endlessly. 

And herein lies the nub of the debate among progressives. Godongwana’s mantra, repeated in successive budget speeches, is that debt harms the poor because the more the state borrows the bigger the chunk of the budget that has to be spent on interest on the debt and the less money there is for social expenditure. 

This sounds like a progressive position: protect the social wage from being squeezed because of excessive borrowing. 

The progressive rejoinder is that what matters is what you are borrowing for and how the debt is invested. If the debt is “smart” then it will be productive: it will catalyse growth or yield socio-economic outcomes such as publicly funded, labour-intensive infrastructure programmes. 

Godongwana appears immune to this argument, and rock-solidly determined to try to contain debt. This leads inevitably to some tough choices. 

Back in February, in the last budget speech, he made an especially brave choice: to keep money in the pockets of taxpayers rather than increase taxes to pay for an inflation-linked increase in the social wage — welfare payments generally, and the social relief of distress grant specifically, which has remained at its original R350 a month level ever since its introduction in 2020 even though inflation and the cost of living has risen sharply in the three years since.

As a consequence, the poor are getting poorer. About 18 million people depend on the social security system (and 10 million receive the social relief of distress grant), which is itself creaking thanks to mismanagement at the SA Social Security Agency. Last month, many recipients had to wait days for their delayed welfare payments — further evidence of this government’s, and the contemporary ANC’s, callous disregard for the poor. 

The Venn diagram overlap between core ANC voters and those 18  million people is significant, even if there is also overlap between them and another circle — the 10  million eligible voters who choose not to even register to vote these days. 

Godongwana’s decision was a strategic one, in the proper sense of the word: it was a decisive response to a difficult dilemma. Unlike his boss, President Cyril Ramaphosa, who prefers to either avoid such awkward moments by not taking a decision at all or else by subcontracting them to someone or something else (a minister for electricity or a commission of some kind), Godongwana deserves commendation for having confronted the situation head-on. 

The treasury has been lauded for continuing to “be the adult in the room”. But it is also playing with fire. As the July 2021 unrest showed, South Africa’s economic wellbeing is very susceptible to political events. 

There is an impressive graph that shows how formal employment has now tracked back to where it was before the Covid pandemic. But, there is a dramatic blip in the upwards trajectory of the formal employment line, as the July 2021 unrest drove the economy down. 

The choices for the treasury and Godongwana are getting tighter. As Sachs put it recently, in a presentation to the Government Technical Advisory Centre, the outcome will necessitate finding a balance between three things: first, headcount reduction (for example through a moratorium on hiring); second, defunding other public expenditure line items (such as capital, machinery, workbooks, equipment, training and maintenance) to finance public sector pay; and, third, adding new resources into the budget by borrowing more. 

Sachs puts it crisply: “The first two options imply a further significant erosion of government capabilities. The last implies a worsening of its financial position.”

Which takes us back to the election. Fiscal choices need to focus on productivity and real economic growth, but accompanied by clear and decisive execution and articulation of policy by the executive (such as in the realm of energy sector reform) and the establishment of a politically independent public service that has the capability to execute policy effectively and impartially, unencumbered by cadre deployment — topics at the centre of former President Thabo Mbeki’s extraordinary rant to a public service management conference on 26 September. 

Because the ANC has no political will to do either of these things, and has essentially completely run out of steam, those macro goals will have to be delivered by the new government, post-election. 

The composition of that new government will be determined by the electorate — or at least those who opt to register and turn up and vote. 

If Godongwana were to raise the taxes of wealthier taxpayers — whether individuals or companies — he risks squashing what limited confidence in the economy remains, as well as the chances of greater investment, thereby limiting the prospects of growth. That, certainly, is his view. 

Continuing to squeeze the social wage and/or introducing regressive increases in VAT to pay for an increase in the social relief of distress grant or other welfare grants will hurt the poor and risk losing core ANC voters. 

Cutting expenditure to create fiscal space for the social wage by reducing the public sector wage bill — either through further cuts in the real value of salaries or cutting public sector jobs — will not be popular among ANC colleagues. About 70% of those who turn up at ANC conferences as delegates are public sector employees. 

Wherever Godongwana looks, there is electoral downside for his party. He, like the ANC, is in a bind, and one largely of their own making. 

Richard Calland is the director of the Africa Office of the Cambridge Institute for Sustainability Leadership and visiting adjunct professor at the Wits school of governance.