South Africa's finances are in bad shape. It's running out of time to fix them

Under President Jacob Zuma the economy didn’t recover as much as it should have from the global financial crisis.
Shutterstock

South Africa’s public finances are in a perilous state. There are four main reasons for this. First, economic growth is low or non-existent. Second, tax revenue collection is repeatedly below forecasts. Third, debt levels have risen rapidly and are now at their highest levels in the post-apartheid era. Fourth, the poor performance of state-owned enterprises is necessitating large-scale government support.

Recent developments since the tabling of the 2019/20 Budget in February 2019 have only made the situation worse. A downgrade of government debt to ‘junk’ by a third ratings agency will lead to an outflow of investment and exacerbate matters further. South Africa is, in fact, fortunate that this has not already happened.

The state of South Africa’s public finances is the outcome of different dynamics in three, overlapping periods. The first was the period after the 2008 global financial crisis. The second was the period under the continued presidency of Jacob Zuma. And the third has been the period since Zuma was succeeded by Cyril Ramaphosa. Careful consideration of these periods contradict widely-circulated claims in the political space.

Some have claimed that South Africa’s woes began with Zuma but this is not true. The first shock to the economy under public finances was the global financial crisis. Others have claimed that Zuma is not responsible for poor economic and public finance performance, but this is also not true. South African economic performance should have been able to recover to a much greater degree than it did under the era of his leadership. Government revenue collection seems to have been negatively affected by institutional destabilisation of the South African Revenue Service.

Finally, the deterioration of economic indicators (growth and employment), along with further underperformance of revenue collection and public finances more broadly, is being laid at the door of Ramaphosa’s presidency. That is simply implausible.

The deterioration can often be linked to factors that preceded Ramaphosa’s replacement of Zuma in early 2018. Admittedly, Ramaphosa has not helped his case by making promises about job creation, for instance, that may be outside the ability of the state to deliver.

Understanding why such claims are likely to be wrong is important not just because of attributing blame, but in order to understand what the fundamental drivers are behind the country’s current state and future trajectory.

Recycled disagreements

Unfortunately, beyond blame, much of the policy discussion is characterised by recycled disagreements. These date to the era in which the African National Congress (ANC) government adopted the Growth, Employment and Redistribution (GEAR) strategy – which was opposed and resented by left-wing parts of the ANC alliance. That strategy was largely concerned with reducing the debt levels the new democratic government inherited from its apartheid predecessors.

For example, left-wing commentators have argued for expansionary fiscal policy. This basically means increasing government spending to a significant degree. They have also claimed that National Treasury implemented ‘austerity’ after 2008. This is incoherent. First, South Africa actually adopted a ‘countercyclical’ approach after 2008: government spending increased faster than revenue. That is how the country’s debt initially escalated.

Second, increasing government expenditure in the manner proposed is, at best, a very high risk strategy. With the country’s public finances already under strain, an increase in expenditure that does not deliver significant increases in economic growth and tax collection will lead to a dramatic deterioration in public finances. That could cause harm for generations to come. These risks, which seem more likely than the benefits, are never mentioned by populists who simply regurgitate arguments from earlier eras.

The reality is that even though Treasury attempted to maintain government spending to support the economy during the aftermath of the global financial crisis, and then attempted to stabilise debt levels using a policy of ‘fiscal consolidation’, it has been unable to do either. The economy has not recovered, arguably due in significant part to the ravages of state capture and other state failures in the Zuma era. Debt targets have been regularly missed. At one point national government debt was expected to stabilised below 45% of GDP, now it has gone above 60% and may reach 70% of GDP within a few years.

There is no consensus among economists or other public finance experts on a specific threshold that is tolerable. What is clear though is that the higher the amount of debt relative to the size of the economy, the greater the risk. This is especially true where economic growth is lacklustre, as it has been in South Africa for some years.

Recent developments have only made the situation more dire. In the 2019 Budget, Treasury indicated that it would have to breach its expenditure ceiling for the first time in order to give support to national power utility Eskom amounting to R23 billion per year for an intended 10 years. That was despite planned cuts to public service employment and additional tax measures.

Since then, Eskom was given a lower-than expected tariff increase by the National Energy Regulator (NERSA). National government has also tabled an additional proposal to give Eskom a further R59 billion over two years.

It seems unlikely that government will be able to cut such vast sums in other parts of the state, not least at such short notice, with the result that debt targets will be exceeded again. And despite the money being poured into Eskom, there is no clear indication of the overall plan to stabilise the utility’s finances.

Meanwhile various other risks, like South African Airways, the Road Accident Fund and medical negligence lawsuits, continue to linger in the background. Economic growth and job creation are virtually non-existent, and both are below population growth. This means a higher unemployment rate and less national wealth per person.

In the face of the crisis with Eskom, public finances and economic growth, the only way to proceed is to secure a societal agreement on the way forward that recognises the need for sacrifices in the face of the crisis. Ramaphosa is uniquely equipped to secure a ‘social compact’ of this kind. But he is moving too slowly. This may be due in part to incessant factional battles in the ANC and an unprecedented assault on Ramaphosa and close allies like Public Enterprises Minister Pravin Gordhan that is being conducted through the Office of the Public Protector.

The president is also heavily reliant on advisers, his Cabinet and senior government officials – few of whom have shown that they can deliver on such a weighty responsibility. But as others have noted: if the country fails to agree in time, decisions will be forced upon it. And under such dire circumstances there will be less opportunity to protect vulnerable citizens with the least to sacrifice.

Seán Mfundza Muller, Senior Lecturer in Economics and Research Associate at the Public and Environmental Economics Research Centre (PEERC), University of Johannesburg

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

South African probe into corruption awaits a star witness -- Jacob Zuma

Former South African President Jacob Zuma.
GCIS

It’s been almost a year since the Commission of Inquiry into allegations of state capture in South Africa began to hear testimony. Also known as the Zondo Commission, it is headed by Deputy Chief Justice Zondo Raymond, who has listened to 130 days of live testimony from more than 80 people. It is probing allegations that the government was captured by private business interests for their own benefit.

During it all, echoes of former South African President Jacob Zuma’s alleged involvement have become deafening. Through various testimony, Zuma has been directly implicated by current and former senior government officials and ministers. They have alleged, among other things, that Zuma leaned on them to help the Guptas – Zuma’s friends who are accused of having captured the state – and to fast-track a nuclear deal with Russia that would have bankrupted South Africa. Also, the governance failures that have resulted in the looting of parastatals, have been blamed squarely on state capture.

Zuma’s turn to give evidence has arrived. Not only does he deny that state capture exists – he’s called it a fake political tool – he’s also cast himself as a hapless victim.

Refusing to engage the concept, he said:

There are people who did things to others in one form or the other‚ and you can call it in any other name‚ not this big name “state capture”.

The allegations against him are that he orchestrated a network of corruption that hijacked South Africa’s developmental project.

The importance of Zuma testifying before the commission should not be underestimated. It will set a precedent that will either show that those that abuse power will be held to account or that the cycle of impunity will continue, reinforcing the unjust systems that enable state capture.

Understanding state capture

Originally, the theoretical concept of state capture referred to a form of grand corruption. In the case of South Africa, it can be defined as the formation of a shadow state, directed by a power elite. This shadow state operates within – and parallel to – the constitutional state in formal and informal ways. Its objective is to re-purpose state governance, aligning it with the power elites’ narrow financial or political interests, for their benefit.

State capture rests on a strategy to align arms of state and public institutions and business to support rent-seeking.

In the events being scrutinised by the commission, the evidence being led shows that actors made sure that all the conditions were created and processes lined up to extract more money than the actual goods and services cost as a way to enrich themselves.

This reveals the systemic nature of state capture. To be successful, it requires the deep cooperation and complicity of the highest office in the land to secure rents, hollow out accountability and maintain legitimacy.

The graphic below, by Robyn Foley, a senior researcher the Centre for Complex Systems in Transition at Stellenbosch University, outlines the alleged strategy of capturing state-owned enterprises, installing compliant officials, undermining the functional operation of government institutions and discrediting critical voices.

The graphic points to a presidency where state capture became syndicated within the state and rent-seeking. Capture is a radical departure from the norms and values upon which a democratic developmental state depends. Like most liberal democracies, South Africa’s constitution provides for checks and balances that are supposed to limit such abuses of power. When these checks are undermined, and the balancing forces are biased, the system becomes a reinforcing loop of bad behaviour, spiralling towards an oligarchic authoritarian state.

In other words, a silent coup.

How did we get here?

Zuma set his presidency on the ticket of state-sponsored development. This entailed using state-owned enterprise procurement, tighter state control and Black Economic Empowerment to realise what has been termed radical economic transformation.

But it was precisely within this agenda, and the governance arrangements that supported it, that seeds for state capture were sown. Tighter state control meant that the flows of information were controlled by only a few, while state-owned enterprises used the biggest share of procurement rands.

There was already billions moving through these state owned enterprises and radical economic transformation was the perfect ideology to bring it all together.

But black business hardly benefited at all from the profits of state capture. If radical economic transformation were to be effected through the constitutional state, it would be enacted through economic policy that supported livelihoods and employment creation. In addition, state capture has hollowed out the very institutions that would have been able to realise radical economic transformation through the constitutional state.

The unravelling

Numerous events over the past decade point to a slowburn abuse of key state resources. One of the first was the irregular landing of a civilian plane at Waterkloof Military Air Base in 2013. The plane was carrying foreign guests to a family wedding hosted by Zuma’s friends, the Gupta family.

Two years later evidence emerged that millions of rands of public funds had been used illegally for upgrades to the then president’s Nkandla homestead. This spending was outlined in a report prepared by the former Public Protector Thuli Madonsela.

The turning point came only months after the release of the Public Protector’s State of Capture report, when Zuma fired then Finance Minister, Pravin Gordhan and his deputy, Mcebisi Jonas in March 2017. The events sent a shock wave through South Africa, triggering mass protests and mobilised public outrage, forcing Zuma to initiate the robust inquiry into state capture.

Our unpublished research shows that, to date, there have been 28 public state capture investigations, inquiries and commissions. There are also 118 outstanding cases of corruption involving government officials and politicians in the intray of the newly appointed head of the country’s National Prosecuting Authority, Advocate, Shamila Batohi.

The true cost of the damage cost by state capture, including the destruction of institutions and lives, is unquantifiable.

South Africans may well be seduced by the prospect of Zuma taking the stand at the Zondo commission. But he was not alone in driving the state capture project. And, the network of actors and influencers is extensive and still very much active. This much has been laid bare in testimony before the commission.

Nina Callaghan, Robyn Foley, senior researchers at the Centre for Complex Systems in Transition at Stellenbosch University, contributed to the article.

Mark Swilling, Distinguished Professor of Sustainable Development, Stellenbosch University

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

Land occupiers to take eThekwini Municipality to court for “criminal” act

Shack dwellers’ homes demolished and possessions burnt

Mafa Zwane shows the remains of his shack. and his bed after the Land Invasion Department demolished his home. Photo: Musa Binda

A week after the most recent demolitions, residents from Azania Occupation in Cato Manor, Durban, endured yet another round of demolitions on Thursday. This time, their belongings were torched by law enforcement. Beds, cupboards, blankets and clothes were burnt. About 70 shacks were demolished.

Most residents were away when the Land Invasion Department struck. They were at the Durban Magistrates Court to lend support to 24 people from the eKhenana Occupation who were charged with public violence after resisting demolitions last year.

Azania resident Mafa Zwane described what happened. “I overheard people screaming and when I walked out of the shack, I noticed that the contingent was already beating some residents, forcing them out of their shacks and demolishing them.”

Zwane used to work at the Sun Coast Casino and rented a flat in South Beach, but when he lost his job in February last year, he joined the occupation.

Gugu Sipamla was also at home when the Land Invasion Department and Metro law enforcement arrived. She said she ran away, afraid of being beaten or shot with rubber bullets.

Sipamla said all her belongings were burnt. She didn’t know where she would now sleep. She has sent her sons, aged four and 13, to stay with a friend. She moved to Azania in February after she lost her job and could no longer afford to pay her rent.

Provincial secretary for the shack dweller movement Abahlali baseMjondolo (AbM), Mqapheli Bonono, said: “What is being done by eThekwini Municipality is against the law and we view it as criminal activity because they don’t only demolish shacks, they steal people’s belongings, beat them up, shoot them with rubber bullets. It worries us when they even decide to burn people’s belongings.”

Bonono said AbM was preparing court action.

Durban Metro Police spokesperson Superintendent Parboo Sewpersad said, “We get called by Land Invasion Department security management only if the crowd becomes volatile; only then we come for backup.”

EThekwini Municipality was not immediately available for comment.

 14 June 2019   By Musa Binda

© 2019 GroundUp.

Bad economic news increases suicide rates – new research

Negative announcements, such as high unemployment rates, rapidly rising prices, and increasing business failures can have an impact on mental well-being.
shutterstock

A slowdown in the economy, job losses, business closures, increasing energy bills: it’s not surprising that relentless negative reporting of economic downturns is impacting people’s emotional health.

Our new research shows that these types of messages can seriously impact people’s mental well-being. And that when indicators of national economic performance are poor there is typically an associated rise in the suicide rate.

It’s already well known that suicide rates increase in times of economic strife and uncertainty. Previous research estimates that the 2007 economic crisis in Europe and North America led to more than 10,000 extra suicides. And findings from last year show that suicides increase both in years of significant stock index decline and in the year that follows it.

Austerity measures such as welfare and health spending cuts have also been identified as the cause of “spikes in suicide rates” among certain demographic groups. There is also evidence that a country’s suicide rate is associated with its maturity or stage of economic development (growth) – with increasing male suicide rates in even the most prosperous developed countries. This suggests that the path taken to increase income over time has negative mental health effects on countries.

Sentiment and suicide

In our latest study, we used data from the US that took into account the 2007 financial crash and global financial crisis. We explored how such economic factors translate into higher suicide rates. Departing from earlier studies on this topic we explicitly considered “consumer sentiment” –- this is the emotional way in which people perceive their economic situation to unfold, such as expecting to lose their job. We used the Consumer Sentiment Index to measure people’s perceptions of their financial situation and the economy in general.

We found a strong correlation between the way in which people view their economic situation and the average suicide rate. So the more negatively people view their prospects, the higher the likelihood of suicide. The data showed how the average suicide rate increased significantly in the aftermath of the financial crisis for all sex and age groups – though this effect was found to be stronger for females than males.

The average suicide rate increased significantly in the aftermath of the financial crisis.
Shutterstock

Our findings suggest that consumer sentiment plays a significantly greater role in explaining variations in the suicide rate compared to traditional indicators such as income and employment figures. So it would make sense that constant negative announcements – such as high unemployment, rapidly rising prices, and increasing business failures – can have an impact on mental well-being. Ultimately, these relentless messages depress consumer sentiment and raises suicide rates.

Our statistical work, however, also shows that a 10% increase in the Consumer Sentiment Index reduces suicide rates by 1%. So the results show that a more positive outlook on personal finance and the economy in general can actually reduce suicide rates.

Reporting the facts

We also tested the impact of increased spending in mental health provision in the US and found no evidence to suggest it lowers suicide rates. This is likely due to other public spending categories, such as in education and employment, being even more important to mental well-being than state level mental health spending.

Clearly, it is incumbent on news media to report honestly and frankly on the state of the economy. Yet rarely is consumer sentiment explicitly recognised as contributing to potentially serious mental health issues.

So in the same way that many media outlets aim for sensitive coverage of terrorism, gun crime and natural disasters to avoid unwanted panic, responsible media communication of issues relating to the economy should also be considered. This could offer balanced reporting that is mindful of mental health and well-being.

Rarely is it reported in economic news coverage, for example, that downturns are always followed by upturns. Cyclical patterns in economic performance are perfectly normal and to be expected. And in this sense, they can be good times to exploit training and education opportunities in advance of the next upturn.

This is particularly important given that uncertainty surrounding the UK’s future is already having worrying effects on people’s mental health – with ministers being told to prepare for a rise in suicide in the event of a chaotic no-deal Brexit.

---

In the UK, Samaritans can be contacted on 116 123 or at jo@samaritans.org. Other similar international helplines can be found here.

Alan Collins, Professor of Economics and Public Policy, Nottingham Trent University and Adam Cox, Principal Lecturer, University of Portsmouth

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

Getting poorer while working harder: The 'cliff effect'

Average Walmart workers make twice the federal minimum wage but may still qualify for public benefits.
AP Photo/Mark Lennihan

Forty percent of all working-age Americans sometimes struggle to pay their monthly bills.

There is no place in the country where a family supported by one minimum-wage worker with a full-time job can live and afford a 2-bedroom apartment at the average fair-market rent.

Given the pressure to earn enough to make ends meet, you would think that low-paid workers would be clamoring for raises. But this is not always the case.

Because so many American jobs don’t earn enough to pay for food, housing and other basic needs, many low-wage workers rely on public benefits that are only available to people in need, such as housing vouchers and Medicaid, to pay their bills.

Earning a little more money may not automatically increase their standard of living if it boosts their income to the point where they lose access to some or all of those benefits. That’s because the value of those lost benefits may outweigh their income gains.

I have researched this dynamic, which experts often call the “cliff effect,” for years to learn why workers weren’t succeeding at retaining their jobs following job training programs. Chief among the one step forward, two steps back problems the cliff effect causes: Low-paid workers can become reluctant to earn more money due to a fear that they will get worse off instead of better.

Trapped

“My supervisor wants to promote me,” a woman who gets housing assistance through the federal Section 8 housing voucher program, who I’ll call Josie, told me. “If my pay goes up, my rent will go up too. I don’t know if I’ll be able to afford my apartment,” Josie, a secretary at a Boston hospital, said.

These vouchers are available to Americans facing economic hardship, based on multiple criteria, including their income. Josie was worried that the bump up in pay that she’d get from the promotion would not make up for the loss of help she gets to pay her rent.

Given the possibility of a downside, many Americans in this situation decide it’s better to decline what on the surface looks like a good opportunity to escape poverty.

This uncertainty leads workers like Josie to forgo raises rather than take the risk of getting poorer while working harder. Having to stress out about potentially losing benefits that keep a roof over their heads and food on their table prolongs their own financial instability.

The pain isn’t just personal. Josie’s whole family misses out if she passes on an opportunity to earn more. The government loses a chance to stop using taxpayer dollars to cover benefits to someone who might not otherwise need them. The hospital can’t take full advantage of Josie’s proven talents.

Not always

Some low-paid workers do get farther behind when they should be getting ahead following a raise. But getting higher pay doesn’t always make anyone worse off. Whether it does or not depends on a lot of intersecting factors, like the local cost of living, the size of the raise, the size of the family and the benefits the worker receives.

The cliff effect is something social workers see their clients encounter all the time. And it’s maddeningly impossible to figure out for the people experiencing it and researchers like me alike.

Some benefits, notably the Supplemental Nutrition Assistance Program, the nation’s largest program designed to alleviate hunger, do include some incentives for recipients to earn more. SNAP, as today’s version of food stamps is known, tapers its phaseout for eligibility as incomes grow, rather than rendering people ineligible as soon as their pay crosses a single threshold.

But low-wage workers, such as those in food service, hospitality and retail have no way of knowing what to expect if they get SNAP benefits in combination with other government programs, such as housing vouchers and Medicaid.

At the heart of this problem is that the help millions Americans derive from the nation’s safety net comes from a fragmented system. Sorting out the repercussions of a higher income is nearly impossible because the safety net consists of a wide array of benefits programs administered by federal, state and local agencies. Each program and administrator has its own criteria, rules and restrictions.

Because that trepidation is sometimes unfounded, my colleagues at Project Hope Boston, a multi-service agency focused on moving the city’s families up and out of poverty, and I started to do something about it.

Fixing it

To help families assess risks tied to the cliff effect, we advised the Massachusetts Department of Transitional Assistance, which oversees state-administered safety net programs, to create a digital tool. Social workers are already using a preliminary version of it to show low-wage workers what they can probably expect to happen to their benefits if they earn more money.

You have to consider a lot of variables to see whether someone will experience the cliff effect.
Massachusetts Department of Transitional Assistance, CC BY-ND

The Commonwealth of Massachusetts plans to put this tool online for all to use by Summer of 2019.

After plugging information about variables like how many members are in the household, what benefits everyone receives, the costs of their regular expenses like rent, child care and medical bills, they become better able to make informed choices about their career opportunity based on their family’s personal financial situation.

But workers need more than just a tool, they need help getting over the cliff. We also help workforce development programs implement the state’s new Learn to Earn initiative, which gives low-income families the financial coaching they need to make educated decisions that could affect their bottom line.

This problem is becoming increasingly urgent because dozens of states, cities and counties are enforcing higher minimum wages, and employers are voluntarily raising pay as well, including Target and Amazon. Some places, including Massachusetts and the cities of Minneapolis and St. Paul in Minnesota, are even phasing in $15-an-hour minimums.

But the reality is that even after some of the biggest minimum wage increases enacted at the state level lately, many families are not earning enough to pay for housing and other basic needs without help – for which they may no longer qualify. Several states, including Colorado and Florida, are seeking solutions.

This complicated and frustrating challenge is just one symptom of an overarching problem. In addition to boosting wages, it will take major policy changes, like making child care more universally available and affordable, to offset the skyrocketing costs of living for American workers.

Susan R. Crandall, Director, Center for Social Policy, University of Massachusetts Boston

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