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Neo-liberals destructive power is behind the state’s financial crash

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Picture: Ayanda Ndamane / Independent Newspapers / February 21, 2024 – Minister of Finance, Mr Enoch Godongwana arrives ahead of his Budget Speech for 2024 to Parliament, in Cape Town on Wednesday.

By Patrick Bond

With commodity prices having crashed since mid-2022, and therefore with much lower tax revenue flowing to the National Treasury, South Africa’s annual state budget deficit rose from 4 percent of gross domestic product (GDP) in 2023 to 4.9 percent for the coming year.

The figure could have been far worse had Finance Minister Enoch Godongwana not decided to sell some family silver from the Gold and Foreign Exchange Contingency Reserve Account.

To be sure, the crash of state finances has been obvious since Covid’s lockdowns required a stimulus, pushing the amount of historic public debt/GDP above 70 percent (up from 25 percent in 2008). But degeneracy can also be traced to massive bailouts for Eskom and Transnet, after corruption became financially debilitating. Repaying corrupted loans.

The process started in earnest when Hitachi had its way with Eskom in 2007, via the ruling party’s funding arm, Chancellor House, in the country’s most expensive scandal, leaving us with often-hobbled Medupi and Kusile generators and higher stages of load shedding.

Parastatal fraud accelerated from 2013 to 2017 during the Guptas’ looting spree, via Chinese suppliers and bankers of Transnet’s coal-bearing locomotives, Denel’s expansion to India, and many other such costly scams.

And during the “lost years” of the 2010s, it was not only parastatals: the Sandton-Rosebank-Umhlanga-Stellenbosch-CT corporate sector was listed in PwC’s biannual surveys as the world’s most prone to “economic crime and fraud”. (At the same time, Transparency International ranked the South African state as not even among the world’s worst 110 bureaucracies, out of the 180 surveyed in its annual Corruption Perceptions Index.)

Systemic corporate corruption led to massive Illicit Financial Flows, which by 2019, even the Treasury’s Financial Intelligence Centre estimated that it cost South Africa up to 7 percent of GDP annually. Even though, thankfully, the greylisting of South African banks a year ago seems to have woken up sleepy Treasury and Reserve Bank “regulators”, enormous damage has been done.

And yet, in spite of new laws to comply with the Financial Action Task Force’s scores of recommendations, the ideology of liberalisation remains powerful; for example, two years ago, Godongwana loosened exchange controls further by allowing R4 trillion to flood out of capital markets (by reducing local reinvestment requirements on major institutional investors from 70 percent to 50 percent).

What this means is that, whether wise or not, the stock of state-controlled wealth that can be drawn down to pay for current spending is limited.

In his Budget speech, Godongwana dug deep into the Reserve Bank forex/gold accounts – now more than R500 billion, thanks mainly to the rand’s depreciation – in order to reduce the public debt by R150bn from now to early 2027.

Other approaches were available, had he and the Reserve Bank wanted to preserve sovereign wealth instead of paying it out to creditors: questioning more than R200 billion in “Odious Debt” (corruption-stained loans taken out by Eskom and Transnet that their bankers well knew were tainted); lowering interest rates to ease domestic bond repayments; and imposing tough capital controls to ensure more money circulates within South Africa.

Tokenistic social welfare

The big test will come in April when Godongwana promises to reveal plans for the 8.1 million unemployed people getting the monthly R350 Social Relief of Distress (SRD) grant. Godongwana last week zeroed them out for the 2025-26 and future Budgets, to reduce spending by a substantial R33bn.

In May 2021, his predecessor Tito Mboweni had removed the SRD grant – and within a few weeks, there was an unprecedented spree of riots, theft, arson and murder.

President Cyril Ramaphosa rapidly reinstated it.

But inflation has eroded the R350 a month that was first paid in mid-2020. An average South African would need R426 to pay for the same basket of goods today – but for poor households, the amount would be far higher because faster-inflating energy and food costs are a higher share of their spending than the national average.

Godongwana doesn’t seem to mind cutting poor people’s income, lying that “To keep pace with inflation and increase access, permanent social grants are increased”.

It’s a fib because the “R20 increase to the child support grant” he announced does not keep pace with inflation: it’s only 3.9 percent higher than the present R510 a month received by 13 million children (out of 20 million in South Africa).

In reality, R65 a day (R1,950 a month) is what a genuine “Upper Bound Poverty Line” would include to cover food, clothing, shelter and other necessities. The R510 pays for just a week’s costs even before Godongwana’s cutback, reducing it to a “tokenistic” grant, just as the R350 a month SRD payment.

Godongwana broke from austerity only selectively: much higher spending (well above inflation) on corporate subsidies via the Economic Development cluster, and dramatically increased army-navy-air force capacity for regional deployments. He gifted the SANDF R3.4bn for what are, in essence, “deputy-sheriff” duties by nearly 5,000 troops, on behalf of mainly Western extractive-industry corporations.

This occurs next door in Mozambique, in the form of SANDF patrols since mid-2021 (aided by US, European and regional military allies), which ensure TotalEnergies, ExxonMobil, ENI and BP can extract climate-catastrophic “Blood Methane” fossil gas offshore Cabo Delgado, during what is an increasingly ferocious Islamic insurgency, amidst more deadly cyclones caused by the Mozambique Channel’s unprecedented heating.

A similar scenario is playing out in the eastern Democratic Republic of the Congo where a Rwanda-backed paramilitary force killed two SANDF troops the week before Godongwana’s Budget Speech, due to their suddenly central role in protecting that area’s predatory resource extraction (often achieved through child labour), on behalf of foreign mining houses and oil companies.

There are ways a resource-cursed economy like our regions can transcend histories of slavery, colonialism, neo-colonialism and the world’s highest inequality. One is to take the principle that instead of merely relating debt to income, we consider wealth as a better measure of state spending capacity, and then steward the region’s natural resources more consciously with that in mind.

It should not be controversial to recalculate state spending affordability using wealth as a criterion (in addition to revenues).

In April 2020, former Treasury official Michael Sachs observed that when Covid-19 hit and a R500bn stimulus was suddenly promised by Ramaphosa, “our fiscal space is not as limited as we might think”. He was referring to what financial journalist Carol Paton termed “the entire public sector balance sheet including the Treasury, the Reserve Bank, the Unemployment Insurance Fund and the Government Employees Pension Fund”.

Two years earlier, even the International Monetary Fund suggested, in its Managing Public Wealth booklet, that the “public sector balance sheet” be adjusted to account for South Africa’s “non-financial assets”, which include all the state-owned minerals beneath the soil. To do so would pull our sovereign “net worth” up to nearly 300 percent of GDP, far higher than the public debt, and also higher than the public balance sheets of most old colonial and neo-colonial powers.

The approach would open fiscal space and compel society to consider non-renewable resource wealth as an asset, not just a source of momentary income enjoyed mostly by shareholders of overseas mining corporations.

Only then, with visionary management of public assets and national financial flows, would a more coherent, generous and investment-oriented state rises from the rubble left by corruption and the fiscal and monetary neo-liberals who have far too much destructive power, as the 2023-24 Budget has once again demonstrated.

Prof Patrick Bond is a University of Johannesburg distinguished professor and Director of the Centre for Social Change