We need to reshape fiscal policy to cultivate a savings culture in SA

Issued by Dion George – DA shadow minister of finance
01 May 2024 in News

Kenya and Chile have successfully made the commendable, and replicable, transition to high-savings economies. Our government once understood the wisdom of responsible fiscal restraint. It is a period well worth revisiting.

During the first decade-and-a-half after SA’s inaugural democratic election, the government did better than most give it credit for. Its focus on protecting individual liberties, steadily improving access to high-quality public education and dignified healthcare, developing a thorough safety net that sought to support all citizens, enhancing community-focused policing and maintaining a strong defence force enabled it to execute its constitutional responsibilities relatively well.

These conditions fostered a remarkably stable, market-based economy, which, over a period of 15 years, sustained an average growth rate of 3% a year — the final four of which saw growth hover at about 5%. The result was a near halving in unemployment figures and a doubling of GDP per capita.

The responsible management of our public purse stabilised SA’s fiscal environment to the extent that our debt-to-GDP ratio was lowered to and stabilised around a healthy 27%. By 2007 we even achieved a primary fiscal surplus. The savings from reduced government interest expenses were used to fund the rollout of one of the most expansive social welfare programmes in the developing world.

SA was making real progress towards resolving the financial and socioeconomic wreckage that was inherited from the apartheid government. The increasingly stable macroeconomic environment allowed for a persistent decline in South Africans’ historically heightened time preference, which measures the extent to which people prioritise current consumption over future consumption. Those with a lower time preference are more likely to save money, as they place greater importance on future security and potential investment gains. Higher levels of nationwide saving, in turn, drove economic growth.

This era of sound fiscal management vanished swiftly as former president Jacob Zuma’s administration ushered in a radical shift in fiscal policy. His turnstile of finance ministers justified the widening yearly budget deficits with the promise of fiscal multipliers. This proved a false pretext, as consumptive expenditure, widespread corruption and malinvestment replaced growth-enhancing capital formation and responsible fiscal expenditure.

The gains achieved over several years rapidly eroded as the government proceeded to squander hundreds of billions of rand on misplaced priorities. The fiscal surplus dissipated and was replaced by a deficit that surged uncontrollably. It left us with staggering debt and desperately little to show for it. Since 2008 economic growth has stagnated at about 1%, the unemployment rate has soared to 41% (expanded definition) and our debt-to-GDP ratio has ballooned to 75%.

Despite the Treasury’s repeated assurances through former finance minister Tito Mboweni and the incumbent, Enoch Godongwana, that it aims to address the spending crisis, the reality differs. Spending pressures continue to escalate rapidly. Data from the national budget revealed that the deficit for full-year 2023 was R347.4bn, which was R71.3bn higher than the previous year. As a percentage of GDP the deficit escalated to 4.9% from 4.2% in the 2022 financial year.

Government expenditure now exceeds 32.2% of GDP. From the 1960s until 2013, expenditure never breached the 30% level. Even as the economy floundered under the National Party government and international sanctions in the 1980s, expenditure levels exceeded 26% of GDP on only two occasions.

If government spending prioritised long-term sustainability by supporting productive enterprises to stimulate capital formation and the modernisation of our national infrastructure, we would have averted rolling blackouts, dry taps and stuck trains.

Years of deficit spending, financed through accumulating debt and one of the world’s most onerous tax regimes, have come to a head. Every departmental budget meant to deliver basic services is now eclipsed by rising debt costs, which are worsened by SA’s high government bond premiums. Today, debt servicing serves as the single largest expense in the national budget and exceeds R350bn for this year alone. SA taxpayers are forced to pay nearly R1bn a day to service debt interest for funds that were misused.

Today, the consequences of the government’s reckless fiscal policies reach deep into the pockets of ordinary South Africans. Disposable income continues to diminish as families, already walking the financial tightrope due to a government-induced cost-of-living crisis, are compelled to allocate more of their household budget to immediate expenses, with little left to save. 

Despite a modest uptick in 2010, SA’s savings rate has deteriorated rapidly since 2008, which has had dire consequences for the macroeconomic environment, too. As savings diminish funds available for investment in productive capital reduce. Investments of this kind are essential for driving economic growth through enhanced productivity and job creation. Without sufficient savings, businesses and entrepreneurs struggle to access the capital needed to innovate and expand, which ultimately leads to economic stagnation.

Lower savings rates also rendered SA dangerously reliant on foreign capital. This poses a challenge when trying to secure foreign funding and is made even more difficult by the fact that in excess of R1-trillion has left our shores during the past decade. It underscores our economy’s heightened exposure to global volatility. These vulnerabilities were notably exposed during the slowdown of global trade that followed worldwide Covid-19 lockdowns and the aftermath of Russia’s invasion of Ukraine.

Addressing these challenges requires that SA bolster its savings rate to create an enabling environment for sustained economic growth. Many would rightfully argue that there is simply nothing left to save, yet countries such as Chile and Kenya offer compelling examples of how a country can course correct in this regard.

In 1981 Chile privatised its social security by shifting from a pay-as-you-go to a fully funded, defined-contribution system with individual accounts. This required all formally employed workers to save 10% of their pretax income. Consequently, Chile’s savings rate soared from 2.1% of GDP in 1982 to 26.4% in 1995. Its income per capita surpassed SA’s soon after.

In 2017 Kenya launched M-Akiba, the world’s first mobile phone-based bond, to enhance savings rates. This initiative allowed investments as low as 3,000 Kenyan shillings ($22) through a widely used mobile payments platform. It simplified the previously complex process of buying treasury bonds. The accessibility of using cellphones for transactions attracted many new investors, with 85% of customers purchasing bonds for the first time. This programme successfully broadened the bond market’s investor base.

Both countries have successfully made the commendable, and replicable, transition to high-savings economies through policies that create an environment where people are willing and able to start saving.

Economic policy must prioritise the areas that will generate growth and jobs. Therefore, the government must ask itself not how much it will spend but what policies will ingrain a savings culture for generations to come.

As May 29 approaches, fiscal irresponsibility cannot be the legacy we accept. It is crucial that voters assess the track record of those in power and reject those who promised tangible improvements in living standards but failed to deliver. This election is not just about choosing new leaders; it is about demanding a government that is dedicated to real and sustainable economic reform.