The road to ruin

RW Johnson writes on Blade Nzimande's challenge to his own govt's policy

Surprisingly little attention has been devoted to Blade Nzimande’s launch of the SACP’s “Red October” this year, though it amounted to nothing less than an all-out offensive against the government of which Nzimande is part. This follows Nzimande’s earlier designation of the Treasury and the Reserve Bank as a counter-revolutionary force attempting to impose an economic policy which has no support within the ANC. There can be little doubt that the Party, as it looks ahead at the overwhelming pressure for economic reform, is positioning itself for a major showdown.  

Cynicism in confusion

Start at the end, with the SACP’s support for this week’s strike by Cosatu, Saftu, Nactu and Fedusa to protest against “poverty, crime, inequality, corruption and unemployment”– plus the government’s non-implementation of the public service pay increase. That is, this is a strike directly against government policy.

It is worth pointing out that if the public service were to get its pay increase this would significantly increase inequality: the less than 2% of the population in the public service would then appropriate 60% of the nation’s tax receipts. Moreover, public sector workers have all kept their jobs (receiving full pay while doing nothing for long periods in the case of teachers).

At the same time millions of private sector workers have lost theirs. In those circumstances even just maintaining public sector pay increases inequality. So the SACP and the unions demanding less inequality are actually pressing for more of it. And they are smart enough to know that.

Moreover, given the enormous sums which get spent by civil servants illegally doing business with government one also has to wonder how real the commitment to anti-corruption is. And since all such activity is illegal, how real is the commitment against crime?

Meanwhile public servants have apparently already started industrial action by staging a go-slow. This rather puts one in mind of Dorothy Parker who, when told that Calvin Coolidge was dead, replied “How can they tell?”

Nzimande called for the rapid implementation of NHI, an end to budget cuts, a “review of Treasury/Reserve Bank policy perspectives” (code for “a complete policy reversal”), the introduction of a wealth tax, a tax on capital transactions, the introduction of prescribed assets and a universal basic income grant (BIG). As may be seen, this amounts to a huge expansion of public spending and is, in effect, a complete alternative economic policy.

New taxes. Really?

Given the extremely shaky situation in which many individuals and companies currently find themselves the imposition of almost any new taxes would be enough to push some of them under water in which case they would stop paying any taxes at all. In other words, proposals for new taxes may be directly counter-productive. The first thing to consider, after all, is that South Africa is already a very heavily taxed country and that if the priority is to stimulate rapid economic recovery, extra taxes on investors (which both Nzimande’s taxes would be) are the opposite of what is wanted.

A wealth tax can sound very attractive but I lived through the attempt of the Mitterrand government to impose such a tax in France. Immediately a clamour went up from farmers who pointed out that their farmhouse was their home as well as their workplace and that to pay a wealth tax on their farms would require them to sell their homes. It was quickly agreed that no one should be required to sell their primary residence. But it was also quickly obvious that to pay a wealth tax one not only had to own large assets but also have a large income – and not every wealthy person had that.

Then came penurious widows who had inherited their mother’s Monet or her diamond necklace. To pay the tax they would be forced to sell these valuable heirlooms. This too was quickly ruled out. And so on it went, with one exception followed by another.

Wealthy people quickly bought farms, Monets or diamond necklaces or simply switched their assets into lower yielding investments so as to curtail their income. Soon the tax raised less than it cost to administer it and it was abandoned as a laughing stock. All the really rich people found it easy to evade this tax and the only real winners were tax accountants.

Then again it is notoriously true that less than ten per cent of South Africans make adequate provision for their pensions. And prescribed assets effectively mean a tax on pension funds by forcing them to accept a lower return. So the introduction of prescribed assets would merely increase the number of penurious older citizens which is surely not what anyone wants.

Spending like there’s no tomorrow

Then we have the extra spending – the public service pay increase (costing around R40 billion), NHI (whose cost is unknown but certainly in the hundreds of billions The SAIRR estimate is R450 billion) – and the universal BIG, which would cost roughly R200 billion. All these costs would be repeated year after year. Nzimande makes no suggestion of where these enormous amounts of money would come from. Certainly not much could be raised from taxes so presumably almost all of it would have to come from extra borrowing.

At which point one should remember that this year’s predicted budget deficit is already around R750 billion and will absorb the whole of the national savings pool. And that figure may well turn out to be even higher if tax receipts fall as much as many predict. If we add in Nzimande’s proposals that huge deficit would double again, which is another way of saying they are quite impossible – though of course Nzimande may well want us just to print all the extra money. That would quite certainly produce hyperinflation.

It might reasonably be objected that Nzimande must know that his proposals are impossible and that he is advancing them merely in order to erect a populist alternative to what the Treasury and Reserve Bank will advocate. But that is the point: this is an attempt to completely overthrow those two institutions and snatch policy-making away from them.

The BIG problem

It is, of course, easy to show that there is a great social need for a BIG, that millions are hungry and unemployed. The problem is that the ANC’s management of the economy has been so feckless for so long that a situation has been created in which the needs of the poor cannot be met without this causing a debt default and a loss of economic sovereignty.

That is, in all conscience, disastrous enough but consider the politics. Two million extra lost jobs means, once you include dependants, perhaps six or eight million more people without income support. An unemployment rate of 40% and a working age population of 38.4 million means 15.36 million unemployed. If you add dependants that means at least 25 million people without income.

Now add the fact that the RET (Zuma) faction – which has already once before played around with the idea of a military coup – is getting desperate as it watches arrests for corruption happening at last. And add the fact that the SACP and its allies on the Left, Cosatu and Saftu, are also getting desperate as they watch the economic crisis threaten to destroy forever any hope of a National Democratic Revolution. And the EFF will want to show they are more militant than anyone else. One way or the other the temptation to mobilize popular discontent is likely to prove irresistible.

This is the real politics behind the Basic Income Grant. The government knows perfectly well that financially it cannot afford it. And it knows that politically it can’t afford not to implement it. And, of course, it can’t even begin to think about implementing NHI or all the other things it has promised. Indeed, it now faces the need for swingeing cuts. To put it bluntly, Ramaphosa and his government now find themselves in a very tight spot indeed, one which they never envisaged when they blithely took office.

This may explain the remarkable step of including Thabo Mbeki at last weekend’s ANC lekgotla. Ramaphosa has doubtless not forgotten the way in which Mbeki undermined him by suggesting he was part of a plot against the president, so including Mbeki within the inner council is a rather desperate sign of wanting to spread responsibility around.

It is also an interesting comment on ANC ethics. Mbeki’s deliberate denial of ARVs to HIV+ sufferers cost the lives of 365,000 people, almost all of them African women and children. That meant killing a thousand people a day every day for a whole year. No other man of any race has ever had so much South African blood on his hands. The only plausible defence for this heinous act was “guilty but insane”. Yet the ANC seems willing to sweep this under the carpet.

Always more

There is also a larger point about all these impossible demands for more and more expenditure. From the word Go in 1994 our black ANC elites interpreted liberation as meaning that they and all their followers should get a lot more money. So in every part of the national economy pensioners, teachers, civil servants, soldiers, police, the prison service, mayors, councillors, city managers, municipal workers, SOE employees and a host of others received inflation plus increases. Year after year.

In every department salary increases gobbled up more and more of the budget, while capital expenditure and maintenance were slashed. On top of which, of course, a huge new class of grant recipients was invented. In the business world BEE firms were allowed to win contracts with massive profit margins. All this huge tide of money went into consumption and all these increases made South Africa’s economy more and more uncompetitive. The steep and continuous fall in the value of the Rand charted the slope.

This ruinous policy has been followed for 26 years and it has produced the mess we see. Politicians have got used to spending more and more and more. Not surprisingly, now that this has produced a huge national crisis, there are many who believe that the solution must be to spend still more and more, even if there’s no money with which to pay for it. Of course all manner of sophisticated Keynesian arguments can be produced to promote this extra spending but it is perfectly obvious that it cannot continue forever. Or, indeed, for at all long.

When this point is reached one hears that “the government must find the money”. The assumption is that there is always more money to be found provided one has the political will to look for it. This is, of course, nonsense. It would be more honest simply to say “God will provide” and hope to heaven that He will. Similarly, if Nzimande were honest he would admit that his policies would inevitably produce a debt default and a begging bowl passed to the IMF.

Ramaphosa’s plan

Ramaphosa promises to come up with a new plan for infrastructure spending. He has spent all his efforts getting a social compact for this but the problem is that he is relying on the private sector to come up with all of the money and yet the assumption is that the state will have complete charge of the programme. This will not work. The private sector knows what it wants to fund and what not and it also has far more skills in project design and management. It will want a good return on the money it puts in and it will not be interested in paying extra for all sorts of unnecessary BEE middlemen, which is how state-managed projects normally work.

Ramaphosa has taken to talking about the need for economic reform but in fact he has suggested no reforms at all. Remember, for a decade and more the IMF and others have stressed the need for fundamental educational reform, an end to subsidies for SOEs, a swingeing cut in the pay and numbers of civil servants and the liberalization of the labour market. On all these issues Ramaphosa is silent.

Part of the problem is that policy blunders have been piled on policy blunders for so long now that not only the political elite but even many ordinary South Africans have come to accept as normal all manner of nonsense. For example, Cricket South Africa happily announces that it will hire only black consultants – as if this piece of outright racial discrimination is not only normal but actually something to boast about.

Ramaphosa laments the incapacity of the civil service but doesn’t seem to realise that affirmative action and cadre deployment have produced this situation. It never seems to occur to him or even to most journalists what a frightful price a society pays for refusing to make appointments on merit. Similarly there is no presumption that tenders will be awarded on merit. Only the quality of the work and price ought to matter but that is never the way of it here.

Take the view of Mick Davis, the boss of Xstrata on Eskom. It could, he says, easily be fixed in a few years if it got a cash injection, the urgent re-introduction of skills, sensible coal contracts and was freed from political meddling. In other words, if appointments and coal contracts were again made only on merit (as they used to be) and if ministers stopped pushing non-market factors and putting useless cronies on the board of directors. Much the same applies to every other SOE. The solution is simple and well known but you can be sure Ramaphosa doesn’t want to hear any of this.

Everywhere else in the world – among South Africa’s Third World competitors, among the capitalist democracies, in Vietnam and China – meritocracy is the rule. South Africa, virtually alone, has thought, crazily, that it could devise its own anti-meritocratic rules. The result is a headlong loss of competitiveness and soaring unemployment.

Hence the extraordinary situation we face. Our government faces the world’s highest unemployment and a huge social and economic crisis but it doesn’t want to entertain any real solutions. It would like to believe that building a whole lot of new roads and bridges plus a lot of talk about “an inclusive economy” will do the trick. It is willing to be this wooden-headed because it still feels fairly sure it can remain in power. Only when it begins to fear that this is in jeopardy will it will be willing to think the currently unthinkable. The problem is that the government has almost no foresight so it will steer straight into trouble.

That moment is coming because today’s “solutions” are not solutions. And the terrible economic damage wrought by the ill-judged lockdown is still working its way through. The first really serious battle will come over the BIG.

If BIG passes then the fiscal crisis will come to a head. If it fails to pass there will be massive social discontent which will threaten the government’s survival. Other battles will follow. The government’s cohesion and self-confidence are at a low ebb and it is unlikely that they have the stomach to face what is coming.

RW Johnson