After terrible GDP growth numbers, the time has come to abandon fiscal stimulus

06 June 2019
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The latest GDP numbers show that the South African economy declined by 3.2% for the first quarter of 2019. This comes after President Ramaphosa announced a R50 billion stimulus package in September 2018. Since that stimulus followed on a decade of stimulus spending instituted since the 2008 global economic crisis, we must now ask whether Minister Pravin Gordhan’s decision to choose stimulus over austerity was the right one.

Of course, these dire GDP numbers also reflect the failure of Eskom to provide a reliable electricity supply. For this we must thank the department of energy’s IRP document which didn’t provide for deregulating the energy sector. South Africa is currently facing the consequences of bad government decision-making across the board. The twin evils of government spending (which means high taxes) and regulation are harming the economy.

In just the first quarter of 2019 we have seen increases in liquidations, insolvencies and unemployment. At the same time exports have decreased by 26.4% and gross fixed capital formation by 4.5% (the fifth consecutive decline) meaning that the investments needed to set the stage for future growth are declining in real terms. I believe it is not an exaggeration to say South Africa is de-industrialising.

South Africa has yet to come out of the recession of 2009. This despite the finance minister of the time, Pravin Gordhan, launching the process that would take government debt from 22.6% of GDP and bump it up to the current 55.6% of GDP. Instead of being a bulwark against the “nine wasted years”, the minister was a key enabler of the looting and economic stagnation.

In the meantime, countries like Estonia that chose the harder, less popular road of fiscal austerity have recovered and are creating jobs and participating in the fourth industrial revolution instead of trying to hide behind empty rhetoric. Estonia in 2009 experienced a decline of 14.72% in GDP while South Africa experienced a decline of a mere 1.54%. The Estonian government cut spending, including salaries of civil servants, while South Africa increased spending, especially on civil servants.

The result is that Estonia grew by 3.9% in 2018, their third consecutive year of above 3% growth. South Africa meanwhile grew by 0.8% in 2018 and last experienced 3% growth in 2011. Correspondingly, South Africa went from 82nd in the world in 2008 to 110th in 2016 in the Economic Freedom of the World index produced by the Fraser Institute.

To make matters worse, in South Africa, signs of reform are nowhere to be found. The government is pursuing policies such as Expropriation Without Compensation (EWC) in an environment where private sector investment is in decline. As the President’s intervention of 2018 shows, the “new dawn” president is just as committed to fiscal stimulus as his predecessor was. There are no signs that anyone in government has the political will to cut spending on the civil service and state-owned enterprises (SOEs) in particular.

Indeed, Minister Gordhan, unlike Minister Mboweni, has expressed a misguided hope that the Soviet and apartheid era dinosaurs that are our SOEs can be transformed into profitable business concerns. He has done this while overruling the Eskom board and management for trying to introduce reforms i.e., refusing to increase the pay of Eskom’s bloated workforce. Those who hope that President Ramaphosa can take a leaf from Margaret Thatcher’s book, should remember that there’s a reason why James Callaghan and Harold Wilson failed: The Labour Party was allied to the trade unions.

It is telling that only three sectors grew this quarter. One of these is government which added 0.2 percentage points to the GDP. The mere fact that government is included in the growth numbers is an aberration. Government can only grow at the expense of every other part of the economy.

This is because government grows only when it taxes our productive endeavours. It doesn’t need to provide any value to consumers or convince them not to buy from any other entity. If government is a sector of the economy, it is one that grows at the point of a gun, benefitting from behaviour that is illegal if done by anyone else.

To further illustrate the de-industrialisation point, manufacturing was the biggest contributor to the drop in GDP at -1.1 percentage points. The insecurity of energy supply is just one of the problems our government has saddled us with by moving at a snail’s pace (if at all) towards allowing the willing and able private sector to pick up Eskom’s slack.

Most of our problems have been inflicted on us by the government, especially the decision to abandon the fiscal prudence of President Mbeki and Minister Trevor Manuel. South Africans will continue to suffer as long as the private sector is demonised and not allowed to do what it does best.

Mpiyakhe Dhlamini is a data science researcher at the Free Market Foundation

 

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