Barking up the wrong money tree

Now that the dust has settled after the unprecedented political drama of three budgets, it is clear that National Treasury was humbled as never before. Yet, it still managed to double down on its failed neoliberal economic policies of structural reforms and austerity. For the rest of the government of neoliberal unity’s term in office, there will be low GDP growth and soaring unemployment.

The Treasury had become too powerful and arrogant, despite its incompetence. It was more powerful than President Cyril Ramaphosa and cancelled many things he said. Treasury officials were like little prime ministers; more powerful than cabinet ministers and every finance minister sang from their hymn sheet of structural reform and austerity. It was normal practice to arrive at parliament without telling most members of cabinet what was in the budget. On February 19 — the day of budget 1.0 — they assumed everything would be the same. 

The primary objective of economic policy is to grow the economy and create jobs, not to balance the books. The Treasury has failed dismally to achieve these objectives. From 2009 to 2024, the economy grew by an annual average of 1.1%, while 155 emerging markets cruised to an annual average of 4.4%. without much effort. This year, South Africa will have the third consecutive year of annual GDP growth less than 1%.

From the fourth quarter of 2008 to the first quarter of 2025, the number of unemployed people soared by 6.7-million — to 12.7-million — and the unemployment rate increased to 43.1%. After 18 years of declining average living standards and rising unemployment, Treasury’s incompetence should be obvious to everyone. If South Africa was a company, its shareholders would have fired the Treasury. 

A national budget does not operate in the same way a household budget operates. It is not an abstract accounting exercise that is disconnected from the performance of the economy. Because the public sector is such a large part of the economy, its spending decisions influence GDP growth and job creation. According to budget 2.0, when the government spends R1 on construction, GDP grows by R1.86c. It also has the highest employment multiplier of any sector. Every R1m spent on a construction project creates more than three jobs for people whose highest qualification is a matric certificate.

A household’s spending decisions do not usually affect its income. But when the government spends into the economy, national income increases and a portion of the additional spending comes back to it. When the government cuts spending, this has the opposite effect. The government cannot cut spending and expect to grow the economy.

Austerity is a self-defeating policy because it reduces GDP, the denominator in the debt ratio. While a household can cut spending to balance the books, the same does not apply for the government. If the Treasury targeted GDP growth and jobs, the debt ratio would take care of itself.

The 2025 budget standoff was about different ways of implementing austerity, which refers to regressive tax increases, budget cuts, or a combination of the two. In recent years the Treasury has targeted a primary budget surplus — the budget surplus after excluding interest payments — of 2% of GDP. This requires that the growth in revenues must be higher than the growth in non-interest spending. According to this logic, the resulting primary budget surplus will be used to reduce debt.   

Infrastructure will provide no boost to the economy and will decline to 3.9% of GDP in 2027/28, from 4.1%. The shortfall to achieve the national development plan’s target of 10% of GDP is R1.5 trillion during the medium-term expenditure framework period. Primary budget surpluses of R400bn will suffocate the economy and make no difference within the context of a R1.6 trillion borrowing requirement and an increase in debt to R6.8 trillion, from R5.7 trillion. We are back to where we were before the three budgets with a depressing economic outlook and heading for two decades of declining average living standards.

The private sector cannot invest in an economy where people do not have enough money to buy the things they produce — the way out of the crisis is for the government to stop the insanity of austerity and increase investments in people and infrastructure.

Gqubule is an economist