Spending our way to trouble
This year FAnews Online has featured a number of articles alerting you to the importance of reducing debt. Reserve Bank statistics suggest this persistent ‘save versus spend’ message is having little impact on household behaviour – as average household savings expressed as a percentage of GDP dipped below zero recently. The percentage of household debt to disposable income – instead of improving as consumers tighten their belts – is again nearing the 80% mark. It seems consumer already know how to spend their way into trouble. What about the other two components of the domestic savings environment – corporations and government?
Private sector savings is calculated on profit generated after tax. This is the amount of capital companies have to re-invest in the domestic economy. Companies’ spending is kept in check by their shareholders who hold them to account. So we’re not too concerned with their activities. Instead we’ll focus on government where saving is calculated by subtracting recurrent expenditure from recurrent income and adding any capital expenditure. Capital expenditure goes into the accumulation of assets such as roads, hospitals and schools – an investment activity equivalent to saving. Government ‘consumption’ expenditure goes to public sector salaries, wages and administration expenses, social welfare and debt-servicing.
The good and bad of overspending
It’s not easy to classify public sector expenditure as ‘good’ or ‘bad’. If we strip out the affordability debate – add an assumption of zero corruption – and dismiss ‘welfare state’ concerns – then all social spending can be viewed as good. But public sector expenditure has been growing exponentially going back to the mid-1980s. A graph of the last few years of nominal public sector spending is almost vertical! Is the South African government digging a debt hole we cannot get out of?
Through recession economists predict South Africa’s nominal spending as a percentage of GDP will surge to 23%. Rian le Roux, chief economist at Old Mutual Investment Group SA (Omigsa) says this trend will have to be reversed. The continued surge in this type of expenditure will eventually choke the entire domestic economy. Government will end up diverting cash from vital capital infrastructure projects to meet operating costs, social welfare payments and interest – and it will suffocate households and corporations by increasing taxes to sustain this expenditure. The solution is simple.
Six quick fixes for growth, employment and overspending
The first step is for government to acknowledge the problem. The current system is simply untenable – welfare beneficiaries outnumber taxpayers three to one, each rand spent on public sector wages secures less than 70c of productivity (our ‘thumb suck’ statistic – if you could measures this effectively it would probably be worse), and many capital intensive tenders are double or triple the ‘fair’ market value! Government has plenty to do to ensure it receives ‘bang’ for its ‘buck’.
What government should do – says Omigsa – is create an enabling environment in which the private sector can flourish. There are six items on the financial services giant’s wish list. The first – and most important – is for government to dispel any lingering fears over the consistent application of macroeconomic and political policy. International investors remain skittish in uncertain political environments – and would rather sit on their capital than invest in a South Africa where the nationalisation of mines and farm land remain on ruling party (or should we say government) agendas.
The second is to maintain a strong ant-inflation focus. We like what an independent Reserve Bank has achieved in this regard. They’ve stuck to an inflation targeting policy with dogged determination regardless of the contrary views expressed by political parties, trade union and business. Number three – stay tough on crime and corruption. Government claimed victory against crime during the Soccer World Cup, but we’re not entirely convinced… Recent developments such as proposing a state-controlled media tribunal suggest government would rather tackle these twin evils by hiding them from public view rather than eradicating them from society.
Efficiency is the buzzword
Point number four is to raise public sector efficiency through a competency drive to ensure the right people (and not simply those who are politically well-connected) are appointed for the job. The fifth ‘fix’ requires a fundamental review of labour laws that inhibit job creation. Trade unions won’t agree, but the ability to hire and fire is extremely positively correlated to accountability and job performance. As things stand South African employees are virtually untouchable, with companies incurring serious costs in rand and resources if they wish to dismiss a serial underperformer. And finally – government should switch focus from consumption to capital expenditure!
Getting the country back on its feet isn’t rocket science. The World Economic Forum: Global Competitiveness Report provides an easy list of factors considered ‘problematic’ by companies conducting business in South Africa. Government should start with the top three: crime and theft, inadequately educated work force, and inefficient government bureaucracy.
Editor’s thoughts: The solutions to South Africa’s problems seem so clear when we reduce them to writing. But it will require a massive effort from government to follow through on the steps proposed in today’s newsletter. Our concern is the current tendency to dismiss every criticism as having a hidden or racist agenda. Why – in your view – is government more concerned with ‘cover ups’ than delivery? Add your comment below, or send it to [email protected]
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