CEO warns of state collapse in South Africa
South Africa has no choice but to cut government spending, says Business Leadership South Africa (BLSA) chief executive Busi Mavuso – the only other option is for the country to fall into a financial crisis and face collapse.
The CEO this week noted that it appears as if this reality has not fully dawned on government officials, who keep pushing for even more spending as the country’s budget deficit widens and resources to tap into run dry.
“There are only two choices: cut back spending or induce a financial crisis. There is no option in which spending can somehow increase without putting the solvency of the state at risk,” she said.
Mavuso said that there are dangerous narratives being pushed, including the idea that government should spend more because it will somehow magically deliver more social spending and growth. This is simply not true, she said, and will instead lead to insolvency.
“A state tipping into insolvency is a disaster. From Argentina and Greece to Zimbabwe, it inevitably involves massive disruption to public services, the retrenchment of much of the public sector workforce, and the collapse in value of government debt.
“That triggers a crisis in the private sector, which is the biggest lender to government,” Mavuso said.
The CEO said that investors look for certainty and to understand risks. South Africa’s financial position has a lot of risk.
“The less stable the government’s finances are, the more investors have to price for the risk that the government could default. This affects the whole economy because state collapse inevitably triggers a major recession. So, the riskier the government’s finances look, the less the private sector will invest. That means economic growth falls,” she said.
She said that the argument put forward by some government officials that increased government spending would drive growth is self-defeating: if that were the case, the past decade of ballooning governing spending would have delivered record growth.
“Instead, we have had ten years of declining GDP per capita,” she said.
“The problem has never been a lack of state spending; it has been the structure of the economy, failing public enterprises, and crime and corruption.”
She added that state spending financed out of debt also hits the economy in another way: it sucks money out of the private sector.
“If the government is leaning on the financial system to buy its bonds, that financial system is then not lending to companies and people to spend and invest,” she said.
South Africa is currently heading towards a record budget deficit, with some economists saying the hole could grow to as much as R300 billion by the end of the financial year.
Revenue collections are lower than projected during the 2023 budget, and government spending has long shot past the conservative estimates put on the books.
Treasury has already issued “guidelines” to government departments and state entities to cut back spending – however, these have not been welcomed by the groups affected.
Mavuso said the true state of the country’s finances will be laid bare in the mid-term budget policy statement on 1 November – but things already look bleak.
She said that the conversation needs to move towards growing the economy and fixing the various crises – at Eskom, with infrastructure, the poor management of SOEs, etc – and removing the red tape preventing private companies from picking up the pieces of the shattered economy.
“We need to fix the logistics crisis that is directly constraining businesses from exporting and generating the revenue they could be paying to the government.
“We need to accelerate reform of the electricity sector. We need to consolidate reform of the criminal justice system and get on top of organised crime that is consuming both public and private sector resources.
“We need to get the skilled visas system working; we need to finalise digital migration to allow an expansion of data access; we need to fix the education system; we need to improve our international relations; we need to get off the FATF greylist; we need industrial policy that supports the development of a competitive,export-oriented economy.
“Growth is the one enduring and feasible way to solve the government’s financial position and enable social spending,” she said.
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