Economics | Reduced government spending could be a blessing

By Pierre Heistein

This article originally appeared in the Business Report Opinion & Analysis pages on 17 November 2011. To interact with Pierre, visit www.facebook.com/understandingeconomics.

In the current environment of global recession, decreased trade and dangerous debt levels, the South African government has announced a need to decrease fiscal spending over the next five years. Rather than being a restriction on South Africa’s economic wellbeing, this could prove to be a blessing.

Currently the South African economy is far too reliant on government spending to encourage growth. Whenever there is a need to speed up growth, or rescue us from a dangerous dip, the common call is that government should spend, build, employ and implement more. However, government has clearly indicated that it currently lacks the capacity to do so. It is not in their response that the fault lies, but in the call to action.

In the short to medium term, South Africa should not be looking to have more, but rather to use what we already have better. There are a number of opportunities where government can encourage this. The need for action without increased spending could bring a new sense of pressure and urgency to a range of previously debated topics where reform is now more welcome than ever before.

Firstly, the issue of relaxing labour regulations needs to be addressed. The National Development Plan recently released by the NPC has expressed that simply adding workers to the public wage bill does not lead to economic or sustainable employment growth. In order to increase employment in an environment of decreased government spending, the private needs to be better enabled to do so. This does not mean a turn to unfair labour practices, but rather legislation that makes it less risky and costly for firms to employ workers for the short to medium term.

Secondly, and linked to this, the annually increasing tension between industry and labour unions needs to be brought under control. The traditional strike season has now turned into months of economic disruption for firms and workers alike and is enough to scare off any investor from creating opportunities for the unemployed. Better mechanisms need to be put in place to allow fair and rational debate around wage increases without extensive loss of economic gains.

Thirdly, management of municipal spending needs to be tightened. Currently, the biggest problem is not wasted spending, but a lack of spending. On average, municipalities across South Africa fail to spend just under 10% of their allocated budgets. In the current economic climate, this is precious money that needs to find its way into effective wealth-creating projects.

In terms of infrastructure spending, government needs to look to making it easier for the private sector to assist in such services and save it the need for expensive expansion.

Firms can assist in the provision of infrastructure, such as would happen if it were easier for private companies to supply electricity to the national grid. In addition, more pressure can be put on ensuring efficiency so that the need to expand infrastructure is reduced. Better controls or incentives for efficient energy use will help to lessen the burden on the country’s existing power plants. Better internal waste management by firms would free up government resources to be directed to other needs. The same arguments apply to water use.

While the feasibility of individual projects would need to be tested, it is an attitude change that South Africa needs in times of financial constraints. When we can’t have more, we need to make more out of what we have. Once the inefficiencies have been reduced, this will only benefit us when the global economic situation improves.

This article is published under the Creative Commons Attribution license.