CASE FOR STATE SPENDING OP-ED
The good, the bad and the growth dilemma – we can bolster well-being and reduce the cost of debt
With the Medium-Term Budget Policy Statement looming, we’re bombarded by headlines weighing in on South Africa’s public debt. In the context of ever-growing debt, cutting back on spending seems like the only viable way out; a tough-love strategy for self-preservation. In our national context, debt is only one side of the story; the other side concerns more than a decade of slow, jobless growth.
South Africa continues to face multiple and interlinked crises. These include extreme hunger, financial and energy poverty, record-high youth unemployment, the highest income inequality in the world, private and public corruption, deteriorating infrastructure, and the climate crisis. Fiscal policy has the potential to create an environment that can set the country on a growth trajectory. However, austerity measures – in pursuit of unjustified fiscal ratios – have led to very little Gross Domestic Product (GDP) growth, the impact of which has been felt by South Africans who are already struggling to survive. A reorientation of fiscal policy towards more direct interventions on the economy can help improve livelihoods.
South Africa has a growth problem
Debt can be a valuable tool for the economy. For example, when debt is deployed to stimulate the economy, through interventions such as providing support to industries or initiatives that propel high employment, high growth and develop much needed infrastructure. However, debt can only be effective in this regard if it is cheap. Costly debt (meaning debt with high interest rates) means more of the government’s spending has to be in the servicing of this debt. Our economic growth story is undermined by governance challenges and poor policies. As a result, we’re faced with low economic growth, which in addition to factors outside of the government’s control – such as the monetary policy of other countries – is making our debt more expensive.
Low growth and external factors have been the two main causes of interest rate increases. First, the interest we pay on our debt has increased due to increases in the interest rate on government debt of more advanced countries, thus making our debt less attractive. Second, the country has been and is projected to grow slowly. In turn, our slow growth has meant budget deficits, which investors believe the government will find it politically difficult to close. Thus, the interest rate has increased in order to attract more demand from investors that are reluctant to lend given the elevated fiscal risks.
High economic growth generally provides the government with greater tax revenue, which in turn allows the government to spend more, while paying off its debts. When things aren’t going so well, in periods of low growth, there is even more pressure for debt to be used in growth-enhancing ways. Evidence shows that cutting government spending is not a reliable way to reduce debt-to-GDP ratios. In other words, we desperately need a different approach to deal with debt as cutting government spending won’t get us there.
Solutions are in sight
Instead of cutting government spending we can reset the country towards development by focusing on a three-pronged approach that can bolster growth and well-being, while reducing the cost of debt. This approach entails: targeting long-term public employment, prioritising high-value added, employment-intensive industries and investing in economic infrastructure.
#1 Prioritise the support of strategic industries
The state needs to think smartly about which industries to support. Let’s take the automotive industry as an example. The industry has received several subsidies over the years, and has added immense value to the country by being one of the most reliable generators of foreign exchange. The strategic value of the automotive industry lies in its diverse value chain (the elements require a mix of industries such as glass, textile, and electronics) that, when produced locally,can further increase job creation and stimulate the economy. The numbers confirm this: while the automotive production industry employed 33,497 people by the end of June 2023, the component sector whose products are used in automotive production, employed 78,877 in 2022. Industries such as these are strategic in that they offer stability, high value creation, and high employment absorption.
While South Africa has relied heavily on mining to create growth, what the economy needs are industries that offer stable demand. Rather than focusing on export commodities, we should strategise manufacturing industries, such as plastic or steel, which are characterised by stability.
Government support for strategic industries may vary depending on the needs of the industry. Some for example may be helped through access to cheaper financing.
#2 Targeting long-term public employment
While we strategically invest in sectors for job creation, it’s critical to create pathways for young people to access the labour market; and public employment programmes – which will bolster the social infrastructure – are one way to do this.
Youth Capital spoke to more than 100 young people who took part in the Basic Education Employment Initiative, part of the Presidential Employment Stimulus, and they all highlighted how the short-term experience reignited their hopes, and purpose for their future; and how the local economy was stimulated by the monthly stipends. Nonto Sibanyoni, media coordinator at Sunshine Cinema shared that ‘My journey as an assistant brought a wave of positive change into my life. Financial stability was a tremendous relief, but this role offered more than just economic security. It provided a platform for personal and professional growth, equipping me with invaluable skills that have since become the foundation of my career.’
Our country employs insufficient healthcare workers, social workers, and educators. There would be massive societal benefits if the state were to plug these gaps leveraging skills young people already have, since many of them are currently unemployed; in turn, this opportunity would help them develop and gain work experience and income, that spent on the local economy would further generate demand and potentially more job opportunities.
#3 State-led investment into economic infrastructure
Quality physical infrastructure lays the foundation for economic growth and improved livelihoods. Economic infrastructure allows for the production (electricity), transportation (rail and roads) and sale (telecommunication) of goods and services. In addition, it also allows people to have greater mobility, connecting them with job opportunities or accessing markets through entrepreneurial ventures. However, our current state of low-quality economic infrastructure is costly for everyone in the economy. For example, the additional costs of alternative sources of power can be the difference between success and failure for businesses (small businesses in particular). Similarly, individuals are affected negatively by poor or non-existent physical infrastructure. Large parts of South Africa are still characterised by apartheid-era spatial planning based on exclusion. As a result, people who live in the townships or rural areas often have to spend a higher share of their income on relatively more expensive transportation, compared to those who live in areas close to urban centres.
“I am based in rural North West and it costs me R120 to get Kimberly to look for jobs or even print my CVs. I can’t always afford the fare, but there are no opportunities in my village. I often feel isolated and alone,” 26-year-old Sinesipho* shared.
Because of slow economic growth, our fiscal debt is weighing us down. But investment offers us a way out. State-led spending has the ability to sustainably unlock the potential of our young people, create social stability and cohesion, and promote faster growth than what we have had in recent years. In turn, this will allow us to pay down our debt, without compromising social and developmental spending. There is no time to waste. DM
* Not her real name.
Zimbali Mncube is the Tax and Budget Justice Researcher and Liso Mdutyana is the Tax and Budget Justice Research Intern at the Institute for Economic Justice.
Kristal Duncan-Williams and Clotilde Angelucci are the Project Lead and the Communication and Network Lead at Youth Capital.