The inevitable flowery language which made the introduction of Finance Minister Enoch Godongwana’s maiden Medium-Term Budget Policy Statement (MTBPS) didn’t survive the haste with which the minister needed to bring up the practical realities of the day.

He was quick to point out that, “The 2021 Medium-Term Budget Policy Statement is about navigating South Africa’s path to economic and social recovery, drawing on the resilience of her people as well as restoring the sustainability of our public finances and the dignity of our people in the face of a once-in-a-lifetime pandemic.”

In this way, Godongwana weighed into the recently elevated debate on whether South Africa had a debt or growth problem.

In yet another episode in the primacy of growth, economists came to claim that “the solution to pollution is growth” in what came to be known as the Environmental Kuznets Curve.

Using the inverted U-shape diagram which US economist Simon Kuznets had previously used to demonstrate the relationship between growth and inequality, they said that as countries industrialise, pollution will increase — however, at some point it starts to decrease. This, they said, was because, at a certain level of national income, people begin to be more interested in the environment, rather than just jobs and wages. So people would shift from polluting growth to cleaner industries.

Critics have argued, however, that pollution doesn’t in fact decline, but polluting industries are exported to poor countries. Perhaps one of the most important questions that have been raised is whether the environment can sustain the path to the peak, and whether societies can afford the path to the peak, given the instability in the climate and weather patterns we are seeing. 

Will the path to the peak not undo us?

This is an important question we have to consider in the debate between debt and growth, with a particular focus on evidence. Referring to South Africa’s policy-making, former statistician-general Pali Lehohla once remarked that there is no science in statecraft. Far too many policy decisions, as well as programme expenditure, have been based on ideology or political expediency, rather than interventions based on facts and sound analysis. We can ill afford this path, given the instability and risks which have come to define our world and the policymaking environment.

Recently, we have noted that we are being persuaded by those who are interested in our situation that South Africa should spend more money to create growth and overcome unemployment and inequality. In this vein, Godongwana pointed out that since “… the global financial crisis of 2008, South Africa adopted a counter-cyclical fiscal policy. This means that as the economy under-performed, government increased its deficit to counter the impact of the crisis”.

In this regard, South Africa “… spent more than we were receiving in tax revenues on a consistent basis. This, together with the composition of spending, did not meaningfully increase growth.”

To show what the minister was saying, here are some numbers to consider. South Africa’s debt-to-GDP, which denotes national debt as a percentage of national income, stood at 78.5% if we adjust for the savings the country holds in the national revenue fund. This amount has risen from 58.2% in 2019. 

It is also important to realise that national income is not the same thing as government income or revenue. This is to say, national income as denoted in GDP is not the same as national revenue as a percentage of national debt. Simply put, what the government gets from national income in the form of taxes, in order to be able to service the debt. That number stands at 25%.

So only a quarter of GDP accrues to the state to provide services and then finance debt. Or, only a quarter of national income is converted or transferred to the government to provide public goods. That ratio averaged 35% in Organisation for Economic Co-operation and Development countries, rising to as much as 46%. Denmark had the highest tax-to-GDP ratio in 2019 (46.3%), and with the exceptions of 2017 and 2018, in which France was higher, has had the highest tax-to-GDP ratio of OECD countries since 2002.

France had the second-highest tax-to-GDP ratio in 2019 (45.4%). Mexico had the lowest tax-to-GDP ratio (16.5%).

In South Africa, tax revenue as a percentage of debt stands at 36.2%, down from 51% in 2019. This is to say, if we took all the money the government gets from taxes, and paid off debt, it would take us three years, as opposed to the two years it would have taken us in 2019. So, our ability to pay our debt is reducing more and more.

Since we couldn’t possibly spend all the money the government collects in taxes to pay off the debt, we service the debt over a long time. That ratio tells us that for every rand we collect in taxes, 18 cents goes to paying off old debt. That was 12 cents five years ago.

How does this compare with the nations we have been compared to? Argentina defaulted on just $80-billion of debt in 2001, then defaulted again in 2014 with debt at 45% of GDP before the latest crisis.  

Zambia’s debt was 66% only five years before their default this year, with debt at nearly double this line, as the pressures of Covid-19 precipitated the default as revenues collapsed. As an analyst noted, “some of the money was spent on productive and social infrastructure, including roads and hospitals, and some on white elephants. It’s also likely some of the funds leaked”. This is instructive as we look at our situation.

Indeed, the minister noted plans to close the leaks we’ve seen in government finances. This is not new, and few believe that this is a meaningful statement. However, it is important that he insisted that “the MTBPS charts a course that demonstrates government’s unflinching commitment to fiscal sustainability, enabling long-term growth by narrowing the budget deficit and stabilising debt.”

We don’t have to choose between these two goals. But we have to be careful about how we go about them. Let’s wish him well as we look to his February 2022 Budget, and its outcomes. DM