South African businesses and consumers should not expect the SA Reserve Bank (SARB) to lower interest rates any time soon. Speaking at the Centre for Education in Economics, SARB Governor Lesetja Kganyago said: “This [inflation] target [of 3%] would be in line with our peers. It would allow for lower interest rates. It would also make inflation less of a concern in the everyday lives of South Africans.” With consumer price inflation reading in at 7.8% in July, and moderating slightly to 7.6% in August, it is reasonable to assume the SARB will continue with rate hikes of either 50 or 75 basis points through the end of 2022 and through 2023.
Additional comments by the Governor are also revealing in terms of giving colour to his view of government spending and policy more widely. In his view, structural reforms are needed to boost growth, not more spending. On this point, Kganyago said: “Trying to deal with social needs simply through more spending, more debt and higher tax doesn’t really cure the patient, but rather limits the pain while accepting continued decline. Living standards cannot rise materially without growth.”
Governor Kganyago is correct in his assessment. Policymakers across government would be wise to take his insights to heart. The last 15 years of policy and regulations have reversed the progress that was made after 1994 in implementing pro-economic freedom reforms that saw the average GDP per capita in South Africa improve at a remarkable rate. And while they may be well-intentioned, they should be measured by the degree to which they impede or enable individual and economic freedoms.
Without getting the growth fundamentals right – and removing those state-imposed constraints on growth, from an ailing monopoly in electricity provision and distribution (Eskom), to cost-increasing Localisation Master Plans – South Africa will continue to experience the trend of more citizens dependent on forms of government welfare, and fewer citizens in employment. The ultimate outcome is a reality of difficult-to-move poverty and fewer job opportunities.
Given the country’s history and the high number of people stuck in various levels of poverty, grants can play an important role in keeping people economically active and provide a sense of social solidarity. But when the overriding focus becomes redistribution – always capacitated by yet more government control and spending – rather than on how people can be freed and enabled to grow more wealth for themselves, we run into a situation of the low-growth trap. Once caught in this, it is difficult for any government or political party to shrink the size of the public sector, and it requires ever more tax revenue from a shrinking private sector.
As the country heads towards elections in 2024, there will be more pressure from within the current government and Tripartite Alliance for the state to implement more forms of assistance and spending, with the National Health Insurance and a Basic Income Grant foremost on the list. If implemented, these spending plans will be exceedingly difficult to roll back and will heap pressure on the fiscus and future generations. A depreciating currency also means that future governments will find it all the more difficult to repay debts and spending taken on now, as well as the interest on that mountain of debt. The respite to the fiscus by the commodities boom of the last few years will be short-lived indeed.