How not to default

R.W. JOHNSON  / The Medium Term Budget Policy Statement has come and gone, with the cans mainly kicked down the road. We are getting used to finance ministers issuing stark warnings about rising debt levels, the need for “fiscal consolidation” that never quite happens and the need for “tough choices” which, however, the ANC seems resolved never to face. In fact this year there were also some pregnant silences. Transnet’s request for R100 billion was summarily turned down and Minister Godongwana made no mention at all of NHI. This continues what is now a long Treasury tradition of simply ignoring NHI as effectively uncosted and unaffordable.

Within a year or two interest payable on our national debt will absorb up to 25% of all government revenue. That will squeeze the amount available for all other items. In particular, this situation will menace a number of sacred cows:

1. Social grants. Now paid to 19 million people and this is a group on whose support the ANC relies electorally. It should be noted that Godongwana found it impossible to resist the extension of the SRD (Social Relief of Distress) grant of R350 a month. But that’s largely because the SRD already existed. He ignored the clamour for a Basic Income Grant. This probably means that the Treasury will in future oppose the introduction of any new social grants. Indeed, the real battle will be over whether we can afford to continue with existing grants.

2. Tough love for SOEs. This only makes sense if the Treasury can effectively force a number of SOEs to privatize. The recent fiasco where Transnet offered such ludicrous terms to would-be private partners that almost no one applied and the whole exercise had to be cancelled is a case in point. The problem is that Transnet wants to hobble any new partners with all the same old restrictions: Transnet still wants to own everything, the private partners have to employ exactly the same workforce and at the same rates of pay etc. Meanwhile  more money is being passed to the moribund post office and something very funny is going on at SAA – which never quite seems to get sold and which has now started up flights to Brazil, never one of the most popular routes.

3. The public service salary bill. This is what the French call le sacre monstre, the huge untouchable bank-busting item which just keeps getting bigger and bigger. It is grotesque that over 30% of all state revenue goes to pay just 1.2% of the population, particularly since it is common cause that public servants are overpaid and overstaffed and have low productivity. But this is where all the contradictions meet. This is the very heart of the matter when it comes to cadre deployment, the practice which even Ramaphosa regards as sacrosanct. Yet the introduction of competitive civil service exams – and thus meritocratic entry – were one of the great reforms of the Victorian era and the Chinese Communist state uses the same system today. In other words, getting the best man or woman for the job is regarded as essential in a great variety of modern states. It is frankly fantastic that the ANC can still defend what are in effect eighteenth century modes of recruitment. When Enoch Godongwana said that “cadre deployment would kill the Treasury” he knew perfectly well that if he had to rely on poorly skilled and unproductive civil servants his job would be impossible. Yet why should any ministry have to put up with less than the best ?

But the civil service unions are also the last great stronghold of Cosatu power. It is an absurd situation. Cosatu leaders, who are mainly Communists, dress themselves and their members up in red T-shirts, toyi-toyi and demand higher pay as their militant right. Somehow these white collar pen-pushers have suddenly become the exploited masses of the working class. When they get these handsome pay settlements the effect is to further increase inequality in the society – and yet the same union leaders will denounce inequality for all they’re worth. It’s a complete pantomime.

These, then, are the big items – interest payments, public service pay, social grants and SOE bailouts. The question is what will give first ? No doubt there will always be some within the ANC who will favour default on the grounds that bankers deserve no sympathy or even that the debt is illegitimate. But there is a very real fear of what happens next, though in fact it’s not clear what would happen next. Would the IMF be involved ? Would a friendly power (China ?) help out ? Or there could be a disorderly collapse of the currency. We don’t know. One way or another there would be a failure of national sovereignty and probably a collapse of government.

But the idea of doing away with any of the social grants would be regarded with horror by ANC MPs who assume social revolution would follow and that the ANC simply can’t survive without the votes of grant-recipients.

Cutting back on the pay and numbers of the public service may be the most obvious reform, but it too would be bitterly contested. These 1.2 million people are, after all, among the chief beneficiaries of ANC rule and they have all manner of political, financial and familial connections to the political elite.You also can’t cut them back without a war to the knife with Cosatu and the SACP. It’s simply asking too much of our weak and staggering government to take on such a fight.

This leaves the SOEs. Which could be a far easier proposition. We’ve already seen the NUM support the privatisation of Transnet because it could save mining jobs. But in any case, telecommunications, which used to be a state monopoly, is now largely privatised and the heavens haven’t fallen. Electricity production is being privatised and there are no protests (though wait till Eskom gets into a death spiral….!) In general the only people who will resist privatisation hard are the public sector workers thus affected and perhaps some of their BEE suppliers. Over time that should not be insuperable. And think how wonderful it would be for the fiscus to have the ports and railways working properly again, with exports humming. The net cost of privatisation might well be negative.

So Thabo Mbeki may be right. As the fiscal pressure increases we could see a large increase in privatisation. If it staves off default and gets the economy moving again, who will oppose it ?

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