SA’s economy needs a shot in the arm, not austerity

For the past 11 years the South African government has pursued a policy of austerity. In recent years, government has reduced per capita spending (adjusted for inflation) by significant amounts. Spending on public services, for example, health and education, for each member of the population has fallen since 2019, from about R30 000 to about R28 000 in 2023.

National Treasury has confirmed the deterioration in public spending and investment.

But the austerity approach hasn’t worked. Unsurprisingly, the government has little to show for it. Per capita debt service costs continue to constrain the resources available for funding the works of the state. Government debt service costs are estimated to average R412.4 billion per year over the next three years, which is more than other spending areas such as health and education.

In light of this, it is important that the government moves away from the old approaches. Now is not the time for more austerity.

The creation of a government of national unity after the country’s recent elections presents the perfect opportunity for a new approach.

To frame our argument, we quote the renowned economist John Maynard Keynes:

The boom, not the slump, is the right time for austerity at the treasury.

South Africa is in a slump, having experienced more than a decade of weak economic growth. GDP growth has
averaged only 0.8% annually since 2012, entrenching high levels of unemployment and poverty. As a result the government must reflect on the allocation of public resources for the wellbeing and future of all South Africans.

Enoch Godongwana, the finance minister, will have such an opportunity in October when he tables the unity government’s first medium-term budget policy statement. The statement outlines government fiscal policy and the choices the government has made about what to invest in and what to borrow.

Budgets matter. Increasing public investment in key sectors can boost employment, support economic growth, provide a way out of an economic slump and protect people’s wellbeing (a necessary condition for any economy to grow sustainably).

Based on research by the Southern Centre for Inequality Studies at the University of the Witwatersrand over the past two years, we argue that the government should draw on evidence that investment in key sectors – care (health, education and childcare and social development), green economy and public infrastructure – can help to deliver on the promise of 1994 when the country became a democracy. That of healing the injustices of the past and improving the quality of life of all citizens.

These three forms of investment could generate new jobs and help build a more equitable society. They are the basis for the future of South Africa. Without taking care of the country’s children, the economy will not grow. Without thinking about the environment, money won’t buy clean air. Without infrastructure and service delivery, sustainable economic growth will not happen.

What needs fixing

South Africa continues to grapple with unemployment, inequality, poverty and shocks associated with climate change. In the second quarter of 2024, unemployment climbed to 33.5% and, when using Statistics South Africa’s expanded definition, which includes discouraged job seekers, the unemployment rate increased to a staggering 42.6%.

Then there are concerns about economic growth. Real gross domestic product (GDP) grew only narrowly in the second quarter of this year, at 0.6%. The costs of living increased by 5.3% in the same time period.

Why austerity isn’t the answer

Warnings of public debt and public expenditure are often used as an argument to justify why fiscal stimulus (the term used to refer to public investment) cannot be pursued. South Africa is no exception.

However, the logic of austerity would mean that we choose not to invest in South African citizens, contrary to the mandate of the constitution.

Cutting the social wage – spending on health, education,
social protection, community development and employment programmes – is against the evidence of existing demands on social programmes in the country. It also flies in the face of evidence that cuts to public investment can lead to higher public debt, undermine development, and lead to unrest. The concerns about public debt, in and of themselves, do not justify cutting the social wage and investments in the future.

Failing service delivery is one of the symptoms of the deterioration in public spending and investment in the capacity to run governments. That’s due to budget reductions and, in some cases, corruption. This creates a vicious cycle, worsening unemployment, poverty and inequality.

Making the state work cannot mean imposing austerity alone (opportunists, corrupt actors and the like will adjust to any ideology). Instead there’s a need to move away from austerity to make the state work for the wellbeing of South Africans. This should be the goal of any national unity budget.

South Africa has examples of beneficial public investment. For example, social grants have had positive effects. They protect people’s livelihoods. They also create an economic baseline from which individuals can contribute to society. The Presidential Employment Stimulus – which provides work and livelihood support opportunities for young unemployed South Africans – has shown promising outcomes for employability and positive effects on the economy.

The case for more spending

Our call for an increase in expenditure is not a proposal to support more “tenderpreneurs” – a South African term for business people who secure government contracts through political connections, or other money-capturing elites.

Rather, we’re making the case for using fiscal policy for the big push required to mobilise enough public investment to tackle the intersecting crises facing South Africa.

Research by Ozlem Onaran and Cem Oyvat, both economists at the University of Greenwich, shows that investment in care, green economies and public infrastructure is expected to have a strong positive effect on GDP and employment in both emerging and high-income economies.

Just 1% of yearly investment (as a ratio of GDP) in the care economy for five years is estimated to increase GDP by 6.9% and total employment by 8.8% over a five-year period.

Education, health, social development and childcare are at the core of the care economy. A green economy includes renewable energy, energy efficiency and public transport. Public infrastructure refers to gross fixed capital formation: investments in long-term assets like hospitals, clinics, roads and equipment that will help improve services.

Investing in care, the green economy and infrastructure would be mostly self-financing because it could generate revenues.

The way forward

Cuts to public investment can actually lead to higher public debt, undermine development avenues and democracy, and lead to unrest.

If South Africa’s government of national unity is serious about addressing the economic and social challenges facing the country in the quest for a better future for all, it should heed the evidence.

Thokozile Madonko, Research Manager, University of the Witwatersrand and Fabio Andrés Díaz Pabón, Research Fellow, African Centre of Excellence for Inequality Research (ACEIR), University of Cape Town

This article is republished from The Conversation under a Creative Commons license. Read the original article.