Key topics:
- ANC’s failed VAT hike led to the budget speech cancellation.
- South Africa’s soaring debt risks an IMF bailout and policy overhaul.
- Weak growth, corruption, and global tensions threaten economic stability.
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By RW Johnson ___STEADY_PAYWALL___
If you read the local media the big story of South Africa’s budget this year was the ANC’s last minute attempt to hoodwink its coalition partners and the resulting cancellation of the budget speech. This was, however, merely the small change of coalition politics. The big story is that the government has run into the buffers and that at a time of great international uncertainty.
To recap: ever since 2008 the government has been spending more and more and running up its debts to do so. Although the IMF thinks the safe debt level for a country like South Africa is to owe not a penny more than 60% of GDP, in fact the debt stands at just over 76% of GDP and even the ANC has become extremely nervous about letting it go any higher for fear of the Big Bad Wolf waiting around the corner. The Wolf is, of course, the IMF: if the debt becomes unpayable South Africa will have to apply for an IMF bail-out and the terms of such a bail-out would undoubtedly mean ditching most of the ANC’s economic policies. Such an outcome would signal the definitive failure of the ANC and the conclusive end to its National Democratic Revolution.
The problem is that the ANC’s economic policies are so inimical to growth that the South African economy is hardly growing at all. But the ANC runs a vast patronage state and all its clients in every direction keep pushing for more expenditure. The state-owned industries (SOEs) all employ vastly more people than they should and all of them lose money thanks to mismanagement and corruption. So there is huge and continual pressure for big state bail-outs of the SOEs.
All the major cities and towns run by the ANC are in a state of ruin with power cuts, water cuts and collapsing infrastructure. The main reason for this is that local ANC elites employ vast numbers of their friends and relatives on those city payrolls and there is runaway corruption. But, again, the state is under great pressure to bail out these cities and pay some of their outstanding (and huge) debts.
Then again, the 1.3 million public servants, the heart of the black middle class, are the ANC’s favourite children. They are already paid around 30% more than workers in comparable private sector jobs and they also have good pension and health benefits. But year in, year out they also get inflation-plus pay settlements. This has just happened yet again and the cost is enormous – over R700 billion a year.. And so it goes.
But with the growth rate at only 0.8% there just isn’t the money required to keep all these clients – and there are many more of them – happy. Meanwhile the Black Economic Empowerment lobby wants more and more, which can only be provided by taxing the productive private sector in order to redistribute to the largely parasitic BEE crowd. This in turn further damages growth. Moreover, the ANC and SACP have all manner of huge spending plans – the creation of a state bank and a vast National Health Insurance scheme for starters.
The result is that an ANC finance minister finds he is being pushed to spend more and more – but the tax revenue just isn’t there to pay for it. So either he has to increase taxes yet again, although South Africa is already one of the most heavily taxed countries in the world. Or he has to borrow yet more, which he has sworn not to do. Or he has to make large spending cuts – which can only occur by damaging the ANC’s patronage network. Faced with these horrid choices every finance minister settles ineluctably for raising taxes because, after all, a great deal of those taxes will be paid by the better-off whites. In effect the ANC regards them as a bottomless pit, so there is always room to “soak the rich” a bit more.
This is how it came about that this year the ANC tried to sneak through a 2% increase in VAT, telling their coalition partners about it only at the last possible moment. But their partners revolted – they want spending cuts instead – so the whole budget got cancelled.
Meanwhile, this entire rickety structure is coming under harsh international pressure with the cancellation of US aid and, almost certainly, South Africa’s AGOA privileges. On top of which some of Trump’s sweeping new tariffs are bound to strike at least glancing blows to South Africa.
But the larger picture is that the world has lost its hegemon. As the economic historian, Charles Kindleberger, pointed out in 1973 the Great Depression occurred because Britain was no longer able to play the hegemonic role and the US was not yet willing to. For the hegemon had to stabilize the world market by maintaining a relatively open market for distress goods; it had to provide long-term and counter-cyclical lending and police the relative stability of exchange rates; it had to act as the lender of last resort and provide liquidity in a financial crisis; and it had to ensure the co-ordination of other nations’ macro-economic policies.
Britain played that role in the 19th century and after 1945 the US took over that role. But it is now quite plain that we are back to dog-eats-dog and devil take the hindmost. Trump’s America will not play the hegemon and China is not willing to either – indeed, it is actively destabilising world trade by dumping huge amounts of exports onto world markets, wiping out other nations’ textile, steel, solar panel or other industries. In this new and distinctly hostile environment every country has to beware and not get into situations where, in the old phrase, “it has to depend much on the kindness of strangers”.
The problem is that South Africa has got itself into exactly that situation. Its poor economic performance and irrational economic policies have made it extremely vulnerable. It depends utterly on its creditors and it is straining their patience. On top of that it has been foolishly provoking the USA by adopting a whole series of hostile and unwise stances in foreign policy and it seems to have done that without the least consideration of the probable consequences.
Even in South Africa’s own terms this has been hideously unwise. Thus, for example, Pretoria campaigns noisily for African seats on the UN Security Council. But nothing is more certain to convince the veto-wielding Western powers that they don’t want South Africa on the Security Council than South Africa’s irresponsible foreign policies in recent time.
But the situation is potentially far more serious than that. South Africa assumes that if the worst comes to the very worst it will have to fall back on the IMF as the lender of last resort. Indeed, in recent time Pretoria has been hungrily taking low cost loans from the IMF and World Bank. But the US effectively wields a veto at the IMF, so it is quite possible that Trump might decide that he doesn’t want any more IMF money to be lent to South Africa. That might include refusing a bail-out if, as seems only too possible, we get to the point of asking for one. In which case Pretoria would face complete economic collapse.
Ronald Lamola, the new foreign minister, has begun his term by mechanically re-affirming that things like the Expropriation Act and South Africa’s case against Israel at the ICJ are “non-negotiable”. Instead he should stop, think and declare that in future South African foreign policy will be strictly based upon the country’s own national interests – which is, after all, the norm for all other countries. Pretoria has for some time been skating on extremely thin ice and beneath that ice lies some very deep water. To continue behaving this way is not merely foolhardy but could have truly catastrophic consequences.
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