SA must take a ‘bold step’ towards fiscal sustainability

The re-evaluation of government spending, although much needed, will not be enough to address South Africa’s immense economic challenges. There also needs to be stronger political will and leadership to address poor implementation, writes Dr John Purchase, CEO of the Agricultural Business Chamber.

SA must take a ‘bold step’ towards fiscal sustainability
According to Dr John Purchase, the holistic rural development strategy touted in Chapter Six of the National Development Plan has been poorly implemented by government over the past eight years when more funds were available.
Photo: FW Archive
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In his Supplementary Budget Speech in June, Minister of Finance, Tito Mboweni, indicated that government would adopt a zero-based approach to budgeting.

This would essentially mean that the budget is created from scratch every year, rather than using the previous year’s budget as the starting point. All government departments will have to justify all their expenses and will need to show that their programmes and actions will be worth the money allocated thereto.

Mboweni is set to deliver the Medium-Term Budget Policy Statement (MTBPS) at the end of October, and this will be one of the most defining moments for South Africa and its economy over the past two decades.

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The COVID-19 pandemic erupted when South Africa was already in a weak fiscal position, following years of growing debt and weak economic growth.

Stabilising debt

Over the past five years, South Africa’s real GDP growth averaged just 0,8%, and real GDP per capita has been negative over that period.

As a consequence of this, the country’s sovereign credit ratings have deteriorated over years, with South Africa now rated below investment grade by Moody’s Investor Service, Standard and Poor’s Global Ratings and Fitch Ratings, and was eventually excluded from the FTSE World Government Bond Index (WGBI) on 1 May.

On the fiscus front, the rise in debt before the pandemic is due to fundamental structural misspending and misallocation of the borrowed funds by government.

This is not something that happened overnight; it was a decade-long rise in debt, accompanied by poor allocation of how that debt was spent on unproductive areas of the economy, and the generally poor economic growth as previously alluded to.

Given the destructive impact of the pandemic and subsequent lockdown measures on the economy, this scenario is not sustainable.

Government has, by all accounts, adopted an active approach in managing the fiscal crisis and low economic growth.

Not only will Mboweni have to indicate how National Treasury will stabilise debt through structural reforms to boost economic growth and measures to increase revenue collection, but will especially need to indicate how the state will significantly curb expenditure.

In the process, National Treasury will need to boost its credibility, which has been eroded as a result of failing to meet its fiscal targets over the years.

The debt stabilising process will also impact the Department of Agriculture, Land Reform and Rural Development (agriculture department).

In the department’s 2020/2021 special adjustment budget, the original budget set at R16,8 billion was adjusted downwards by R2,4 billion to R14,4 billion. Five of the department’s six programmes saw a reduction as follows (Source: Parliamentary Monitoring Group, 2020):

  • Administration budget reduced from R2,73 billion to R2,65 billion.
  • Agricultural production, health, food safety, natural resources, and disaster management budget reduced from R3,22 billion to R3,031 billion.
  • Food security, land redistribution, and restitution budget reduced from R8,12billion to R6,22 billion.
  • Rural development budget reduced from R1,09billion to R898 million.
  • Economic development, trade and marketing budget reduced from R885million to R750 million.
  • Land administration budget increased from R756million to R869 million.

There are a range of sub-programmes and functions that fall under these programmes, and the exact allocation and justification for each is not clear as Agbiz is not privy to that information.

Furthermore, agriculture, land reform and rural development are diverse and complex, with both commercial and development considerations that have to be balanced to ensure that acceptable levels of both national and household food security are achieved.

The agriculture department cannot be held responsible for that, as many other departments and state-owned enterprises have significant roles to play.

No holy cows

Agbiz has long supported the holistic rural development strategy touted in Chapter Six of the National Development Plan, but this was unfortunately particularly poorly implemented by government over the past eight years when funds were more readily available.

So, it is not just about funds and budget allocation, but also about political will and intention (leadership), the capability of the state and civil servants, and harnessing the capacity of the private sector to perform certain functions far more efficiently and productively through public-private partnerships.

Currently, we are trying to develop a master plan for agriculture and agro-processing, which will essentially be a social compact between government, business, labour and communities.

It is clear that there are fundamental differences in approach between the different constituencies, as well as a distinct lack of trust.

This would necessarily then also translate into how budgeting should be done, especially on a zero-based approach. From the industry side, it is believed that more emphasis should be placed on land administration/restitution, and the range of services that enhance real and inclusive economic growth.

However, even with regard to the latter, there are vastly different approaches and understanding of the issues at hand.

So, where should we be cutting expenditure? There are programmes such as the National Rural Youth Service Corps and agri-parks that require total restructuring.

Agri-parks are in principle a very good concept, but the design was inappropriate and was implemented poorly.

There are various other functions, and even institutional funding, that need to be re-examined and scrutinised. There should be no holy cows in this zero-based budgeting process, and the private sector should be consulted.

If we don’t get this right, then we will most certainly run into a sovereign debt crisis around 2024, as Mboweni has correctly warned.

Our challenges are immense, and the MTBPS should take bold steps and also urge various departments to implement the much-touted structural reforms to get our country onto the right economic growth trajectory and fiscal sustainability.