Disaster II: The Bills Come Due.

There has been a very enthusiastic response to the latest Medium-Term Budget Framework issued by the government. There are good reasons to be suspicious of anything which attracts an enthusiastic response from the crooks, fools and toadies of plutocracy who constitute our opinion-forming class. There are especially good reasons to be suspicious of praise for the present government, which has a very solid track record of lies, dissimulation and breaking promises. Possibly this enthusiastic praise derives from the assumption that what is being done will be beneficial for the corrupt layabouts who infest South Africa’s boardrooms. Possibly it derives from sheer habit, since those corrupt layabouts have been commanding enthusiastic praise for their Cabinet catspaws ever since the Week of the Long Knives in September 2008, when Zuma and his criminals were installed in positions they were comically unfit to sustain.
So let us look at this Budget Framework.
There are a few serious problems with the South African economy. Employment is declining due to lack of investment. The distribution of wealth is terrifyingly unequal and growing more so continually — has been since a few years before Zuma took over, but certainly Zuma has made the situation worse. State expenditure massively exceeds state revenue. We import far more than we export. Infrastructure is in a state of decay and the socio-political systems intended to resolve the problem at municipal and provincial level are utterly inadequate to meet the crisis. Economic growth is sluggish at best. Meanwhile, the state has committed itself to a gigantic but overpriced electrical generation programme which bleeds the fiscus of resources to ameliorate any of these problems.
So — let’s see what the Medium Term Budget Framework entails. The assumption is that in the near future growth will be around 3% per annum, although the pretense is that at some time in the future it will, for no obvious reason, zoom up to 7%. There is no plan to increase investment; on the contrary, exchange control for corporations is being further relaxed to encourage them to invest abroad. There is no plan to increase employment; the plan is to phase out the puny subsidies paid to corporations to discourage them from sacking workers. There is no plan to redress the skewed distribution of wealth. There is no plan to increase state revenue. There is no plan to increase exports or decrease imports.
This cursory survey shows us that the MTBF offers no solutions to any of our problems. On all the major issues, the MTBF thus is relying upon the market to solve the problems, or is assuming that the problems, in some other way, will disappear all by themselves. It is worth pointing out that these problems have arisen partly because the Mbeki administration neglected to deal with them effectively or was distracted from dealing with them by the growing political instability after 2004, and partly because the Zuma administration has done essentially nothing about any of them. In other words, the experience of the last few years suggests that all these problems tend to grow more extreme if the government refuses to address them. Hence the neoliberal argument that not doing anything is good (because governments only mess things up) is manifestly false. However, this argument may lie at the root of the praise for the MTBF, since governmental inaction makes it easier for rich people to loot the system and thus they naturally pay their praise-singers to endorse this.
Well, what are we going to do with this 3% growth, assuming that it happens? The MTBF proposes to use this growth to reduce the budget deficit. This is not necessarily a bad thing. The current budget deficit is somewhere between 6% and 7%, down from somewhere between 7.5% and 8% last year. This 1% reduction has taken place due to a massive increase in revenue from company taxation; baldly speaking, company tax derives from company profits, and companies made very little profit in 2009, whereas in 2010 they are making a much more substantial profit and hence there is more to tax. This is, in short, an extraordinary increase in revenue due to the fact that the economy has stopped contracting and begun to expand a little. It won’t happen again.
Now, notice another annoying point. A few years ago we had a budget deficit comfortably below 2%. Under Zuma it has risen well above 6%. This is not simply due to Zuma’s mismanagement; it is due to a shortfall of income together with an excess of expenditure, and only the excessive expenditure is due to mismanagement. However, now that the income is up again, note that the deficit is still huge — immensely greater than it was under Mbeki, for instance. The plan of the MTBF, in fact, is to restrain expenditure sufficiently to reduce the budget deficit to 5.2% of GDP in 2011, which is approximately what the budget deficit was when GEAR was launched in 1996.
Things need to be said about this budget deficit. According to the ideas of John Keynes, one should spend loads of money during a recession. The reason for this is that during a recession, people stop buying stuff, so the manufacturers of stuff stop making stuff, so they lay off workers who then stop buying stuff, so the manufacturers of stuff stop making stuff, and so on until stuff production virtually ceases and everybody’s on the dole, if there is one. Spending loads of money encourages people to buy stuff, which means that manufacturers continue making stuff and retain workers, who continue buying stuff, and so on until stuff production picks up with the end of the recession. That’s all quite simple.
However, this requires that one should spend money in areas which encourage people to buy stuff. In other words, use the capitalist market to sustain the capitalist market during a capitalist market failure. If you spend money in areas which don’t encourage people to buy stuff, you are actually making the situation worse, because that’s money which could have been used in the economy, but instead the money is being wasted. Instead of spending R20 billion on solid gold hats for all municipal councillors, you should rather cut VAT by 1%, because then the public will have more to spend. (Cutting income tax is much less helpful, simply because only a tenth of the population pays income tax whereas everybody pays VAT.)
The problem with our budget deficit is that it is a business-as-usual deficit rather than an expansionary deficit. It is therefore quite hard to get rid of. The US or British budget deficits will decline sharply now that the US and British governments have stopped borrowing money to give to their banker friends and instead are simply printing it, out of homage to their mentor Robert Mugabe. (Not decline enough, however.) Our budget deficit will be more intractable.
If the current deficit is in the vicinity of 6.2% (it is probably more; the statistics have become increasingly implausible in the last few years), then reducing it to 5.2% seems easy enough. After all, if we have 3% economic growth then that still leaves us with 2% in hand, doesn’t it?
No, unfortunately not. That is a 1% reduction in gross domestic product — the whole economic bang-shoot. What you are reducing is state expenditure, which is about 40% of gross domestic product. What is happening is that expenditure is at 40%, but revenue is at 33.8%. Somehow, that gulf has to be reduced so that expenditure is at 40% but revenue is at 34.8%.
Well — how about that 3% increase? A 3% increase in 33.8% raises the level to 34.8%! Hurrah! Problem solved! We just have to spend exactly the same as we spent this year, and in a year, the revenue will catch up to the level at which our budget deficit is satisfactory! Indeed, if we carry on doing this for two more years, the following year the budget deficit will reduce to 4.2%, and the year after that to 3.2% — and that’s exactly what the MTBF is predicting over a three-year period! All we have to do is not increase our expenditure at all for three years, and sustain an economic growth rate of 3% per annum, and we will attain the MTBF’s goals!
It looks very much as if someone in the Ministry of Finance has spent five minutes with a pocket-calculator and that this was the gist and sum of the intellectual efforts behind the MTBF.
Look, this is not possible. Population growth alone means that expenditure has to increase if service delivery is to remain constant. (In fact, everybody agrees that service delivery is inadequate and must improve, which will take an increase in funds.) The government is committed to a National Health Insurance system which will mean an immense increase in funds which will be only doubtfully affordable and has not been costed yet, although it will kick in around the third year of the MTBF. Historically, large projects almost always have overruns and we must assume that the energy generation programme, which has had a cost overrun every year since 2007, will continue to do so — and here we are talking about tens of billions of rands. 1% of GDP is 25 billion rands, and the cost overrun of the energy generation programme in 2008 was twice that. The MTBF is a fantasy.
It’s even more of a fantasy if you consider that under this proposal, state salaries cannot increase faster than the rate of inflation. Unfortunately, they have been increasing faster than the rate of inflation every year for ten years, so this means that somehow the public service has to be told that it will have a slower rate of wage increase for the next three years than in the past ten. Given that this year many middle-class public servants got an increase 2.5% higher than inflation, and have been screaming the house down because they didn’t get 3.5% and are going around telling everyone that they have been cheated, are they likely to welcome an inflation-constant salary next year, and the year after that, and the year after that? Are we going to see COSATU happily refusing to exploit an opportunity to exploit their members by telling them that they ought to rise up and defy their evil employers? No way. State salaries amount to a vast chunk of state spending (in some departments, more than 70%) so when they get increases higher than the rate of inflation, the bill goes up fast.
What that means is that expenditure is likely to increase substantially. Probably we are talking about a 1.5% increase in expenditure, at a minimum. Let’s tabulate that.

Revenue (at 3% growth) Expenditure (at 1.5% growth) Deficit
2010 33.8% 40% 6.2%
2011 34.8% 40.6% 5.8%
2012 35.8% 41.2% 5.4%
2013 36.9% 41.8% 4.9%

As you can see, that’s not enough. Now, it isn’t bad, but it isn’t enough. It isn’t anywhere near where the MTBF hopes it will go. Please note that in 2013 the budget deficit is still 163% of the economic growth rate, meaning that the national debt will be growing like a house on fire. In those four years the national debt will have grown by 22.3% of GDP. And that assumes that we do not have any serious global economic downturn which reduces our economic growth below 3%. (If economic growth averages 2.5%, here’s how the table looks:

Revenue (at 2.5% growth) Expenditure (at 1.5% growth) Deficit
2010 33.8% 40% 6.2%
2011 34.7% 40.6% 5.9%
2012 35.6% 41.2% 5.6%
2013 36.5% 41.8% 5.3%

And that’s a problem left out of the equation. Various countries are starting to put up their interest rates and if they do, we will have to, in order to attract capital to balance out our trade deficit. In that case, having a massive debt will become a problem, because you pay interest on that debt. If the interest is only 5%, then an extra 22% of GDP means an extra 1.1% of GDP is being paid servicing that debt. Which means that as of 2013, the expenditure would have to be in the vicinity of 42.9% to accommodate this. Which means that the deficit would be 6%, or virtually where you started. Alternatively, you would have to slash real expenditure back still further in order to make room for debt servicing costs. But then where does the cut come from?
The MTBF is a fantasy, but it is a dangerous fantasy. COSATU is correct to suggest that it is a neoliberal plan, because it valorises (and reifies) spending cuts and ignores the responsibility of the government to resolve the problems faced by the nation. Of course, COSATU has also endorsed this plan, so they are as responsible for it as anyone else.
It seems that we are in even bigger trouble than we knew before. But we should have guessed that from the newspapers. Every positive headline received by Zuma’s team suggests that we are a step nearer damnation.


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