STUART THEOBALD: No simple answer to social spending effects

It is easy to pick out single causes for moments in history in which the course of events was altered.

Our brains crave simple narratives that fit our existing world views. The assassination of Archduke Franz Ferdinand was the “cause” of World War 1; the end of the Cold War caused the end of apartheid; trading in derivatives by banks was the cause of the global financial crisis. Those are the answers you get from Google.

The algorithms never result in “it’s complicated” because Google knows what our brains crave, and for the same reason columnists are sticking to simple issues that provoke emotional responses.

So grant this columnist some reductive simplicity for a moment. We all know its complicated. But when it comes to this week’s budget from finance minister Enoch Godongwana, there will be one issue among all others that will be the fulcrum on which opinion will turn: social grants. We will ignore the maelstrom of competing policy objectives, political horse trading and bits of evidence that informs the R1.9-trillion budget process in all its complexity and potentially wide-ranging consequences.

The Treasury has faced enormous political and social pressure to open the taps on social spending. The social relief of distress grant, introduced at the start of the Covid-19 pandemic for those unemployed during lockdowns, has ignited a strong push for a permanent grant. The lobby has come primarily from those on the Left, but also some in the centre, who highlight the poverty facing the growing numbers of unemployed and their dependents.


The presidency has been one source of pressure, as have many on the ANC’s radical flank. There have been screeds written on how it is both a moral imperative (which is easy to sympathise with) and somehow fundable without damaging economic growth (which is much harder to sympathise with).

Depending on the particular suggestion, this fiscal impact could be modest at R20bn extra per year permanently, or rather more extensive with numbers often over R300bn/year on top of the budget.

The Treasury has tried to impose some order on this debate, calling for research on how poverty can most efficiently be addressed (costs per unit of poverty eliminated) but such calls have fallen to a stampede of moral indignation.

How the Treasury copes with the pressure will be an important bellwether. A move that is perceived as a concession to a permanent grant will be reduced to an abandonment of the fiscal restraint that the Treasury has been trying to impose for at least the past four years. That would be harmful to growth.

What we are likely to see is a move by the Treasury to kick the can down the road (“studies are being conducted on the feasibility …”) which will probably get some level of grumbling acquiescence from all sides. We are not likely to see a strong rejection of spending demands that are not properly costed and consequences not fully thought through, though that would be the most positive from a growth perspective.

The problem is that it really is complicated. An elegant exposition of conflicting causes of SA’s weak economic performance was provided in a comprehensive paper released by Ricardo Hausmann and his colleagues from Harvard’s Kennedy School last week reviewing the past decade of SA’s economic performance.

It makes clear the path to our current fiscal predicament: a failure to consolidate after the countercyclical fiscal splurge during the financial crisis of 2008/2009. High spending into the post-crisis recession became permanent, leading to the major deterioration of government’s balance sheet and its loss of investment credit grade.

That triggered behavioural responses: the private sector reduced borrowing and spending, anticipating that the government’s weakening fiscal position would have to paid for in higher taxes at some point (in econospeak, the Ricardian reaction trumped the Keynesian one). Hausmann and colleagues find this approach explains some of the GDP growth weakness particularly in the mid-2010s.

But they pin most of the blame for weak economic growth post 2008 on microeconomic policies that damaged productivity. The finger points squarely at Eskom and Transnet, both of which have made it more expensive to produce each unit of output in SA. Policy uncertainty in mining, deteriorating municipal services, and the apparent undermining of property rights through the land reform debate are also identified as causes.

This micro story is a powerful one for the Treasury to refer to. It makes clear that the real drivers of SA’s poor economic growth outcomes are not those within its control. Indeed, it puts the burden of proof back on those pushing for it to let go of the fiscal reins, demanding they shift attention to the real growth blockages in the SOEs and policy uncertainty.

It is a loud “it’s complicated” answer to those trying to reduce SA’s travails to a narrative that fiscal spending, particularly of the social welfare type, can solve all problems.

• Theobald is chair of research-led consulting house Intellidex. This article first appeared in Business Day.