By now, we’ve all seen the headlines about South Africa’s 51% GDP contraction for the second quarter of 2020, a 16.4% decrease compared with the first quarter. While it bounced back in the third, it’s still worrying. Stats SA reported an unemployment rate of 35% in the second quarter and bank processing data have revealed that only one in five South Africans has received their full salaries since April 2020.

We always knew the national lockdown meant sacrificing economic growth for the sake of containing Covid-19. And South Africa is not alone: the world is grappling with the fallout of what will probably be a deep recession for years. So, how do you continue to pay a public sector wage bill of R640-billion and make good on your plans for social grants and financial relief? The answer is, borrow more money. 

Concerns about increasing sovereign debt have grown since World War 2 when many countries became indebted as they financed either the war or rebuilding afterwards. The idea was that high levels of public debt were acceptable when the country needed it in lean times, as long as that debt could be repaid during times of growth. But what happens when the debt only ever gets deeper?

South Africa’s debt-to-GDP ratio went from 60% at the beginning of March to 81.8% during our mid-pandemic point, with Medium-Term Budget Policy Statement estimates that it will reach 100% by 2023. Bear in mind that in 2013 our debt-to-GDP ratio was 44%. This consistent upward trajectory of debt would be more noteworthy than worrying if government spending had meaningfully boosted GDP. 

Unfortunately, South Africa is debt-financing its expenditure instead of limiting its debt to infrastructure and investments. We aren’t using our debt productively. Instead, it’s falling into a money hole of state-owned enterprise (SOE) bailouts, a bloated public wage bill and illicit money flows. The average state salary tripled since 2006 – an increase of 45% once adjusted for inflation. The 1.3 million employees of the state cost R567-billion in compensation in the past financial year, which means 11% of SA’s total GDP is now spent in that way.

The extensive Covid-19 corruption scandals are a prime example of the widespread waste of public funds. Tenders were awarded to one-man operations that sprung up overnight with inflated prices and no capacity to deliver. The consequences aren’t only economic and structural, they’re also deeply human. The essential services staff who didn’t receive their protective gear, the late-, under- or non-payment of unemployment and relief grants, and the unequal and uneven distribution of food aid, are all casualties of a flawed and problematic system, prevalent long before the pandemic, that continues to fail our country.

It’s not just a Covid-19 problem. Most of our state entities remain overstaffed and badly run; and some of the worst offenders historically received more financial support. In the private sector, even a minor infraction can lead to termination. Imagine if the same standards were applied at a state level. In our last State of the Nation Address expectations were created of government official KPIs being made public. If listed companies with public shareholders are required to publish remuneration details as part of good governance, shouldn’t the government be held to a similar standard when there’s even more at stake? Are we, as citizens, not public shareholders in the resources of South Africa Incorporated? 

The need for economic and policy reform grows more urgent with every year that things stay the same. I have lost count of all the economic reform plans that haven’t been executed. We need real action against crime and corruption – let the first VBS Bank convictions lead the way. We need to mobilise our large-scale infrastructure projects by putting technocrats in decision-making roles, not political cronies. Why are we creating more SOEs when it’s been proven over and over again that they’re mostly run badly?

We should also improve our tax collections, starting with bringing as much economic activity as possible within the tax net, including non-tax-paying small, medium and micro enterprises and informal businesses. Introducing short- and medium-term taxes (such as a wealth tax) is not ideal since the tax burden is already at a record 28% of GDP at the consolidated level. The infliction of the Laffer curve has been reached. The tax net needs to be wider, not deeper, especially as the tax base significantly narrowed because of the economic trajectory before and during the pandemic (no growth means fewer jobs, means fewer taxpayers).

A word on tax incentives: although they are a laudable way of attracting investors, there’s strong evidence that they are not always effective in achieving the intended objectives and may damage a country’s revenue base and erode resources even more through tax-planning activities. We should consider phasing out incentives and focus on lowering the corporate tax rate to foster economic activity more broadly. The worldwide average statutory corporate tax rate is currently 24.18% measured across 176 jurisdictions. 

With real unemployment on its way to 50%, something (or some leaders) has to change. The presidency is setting its hopes on a new economic recovery plan to create many jobs, broadband spectrum and an Eskom competitor. But getting the government, business and labour to agree is hard and there are some controversies. For one thing, even as the government acknowledges that creating competition and opening up privatisation is a good thing, it’s also talking about nationalising the Reserve Bank, creating more SOEs and prescribing investment fund allocations. I want to be positive and see progress in some of these steps, but I can’t shake the feeling that history will repeat itself again. See you at the next commission of inquiry? DM/BM