Economic transformation,

1 Economic transformation , inclusive growth, and competitiveness: A contribution towards a growth agenda for the south African economy Prepared by Economic Policy Division, National Treasury* Abstract: The combination of low growth and rising unemployment means that south Africa s Economic trajectory is unsustainable. Government should implement a series of growth reforms that promote Economic transformation , support labour-intensive growth, and create a globally competitive economy. Government has a macroeconomic framework that is designed to ensure stability and competitiveness. In light of our competitiveness challenges, we start by highlighting five fundamental building blocks of sustainable long-run growth and then identify a series of specific and detailed reforms to raise potential growth.

2 These growth reforms are organized according to the following themes: (i) modernizing network industries; (ii) lowering barriers to entry and addressing distorted patterns of ownership through increased competition and small business growth; (iii) prioritizing labour-intensive growth in sectors such as agriculture and services, including tourism; (iv) implementing focused and flexible industrial and trade policy; and (v) promoting export competitiveness and harnessing regional growth opportunities. We estimate the economy-wide impact of the proposed interventions over time based on when they can realistically be implemented, and find they can raise potential growth by an additional 2,3 percentage points (above the baseline) and create over one million additional job opportunities.

3 FOREWORD We are facing a slow-burn Economic crisis. Our economy is characterised by weak investment, low savings and untenably high levels of unemployment. Inequality and poverty remain far too high. Our fiscal situation is unsustainable: debt service costs are the fastest growing expenditure item while State-Owned Entities, in particular Eskom, place unaffordable demands on the fiscus. This year, the national debt exceeded R3 trillion for the first time in our nation s history. It is expected to rise to trillion in the next three years. Since 2010, our debt has tripled in rand terms. The investment rate has declined by more than a percentage point.

4 The gross savings rate has come down from 18 per cent to per cent of GDP. Economic growth has fallen from 3 per cent a year to nearly zero. Inequality has risen. The unemployment rate has increased from 24 per cent to 29,1 per cent the highest level in over eleven years. Clearly, we need to do things differently. Weak growth over the last six years is the outcome of both cyclical and structural factors. Policy uncertainty, drought episodes and most recently load shedding by Eskom have compounded and prolonged the effect of weaker confidence, leaving us with an economy that has almost 30% unemployment.

5 Our assessment is, however, that structural factors have dominated. Estimates of long-term potential growth have fallen from close to 4 per cent in the late 2000s to between 1 and per cent. Total factor productivity growth has been negative for the last five years, which means that we are producing less with the same levels of capital and labour. This has led to sharply declining competitiveness, which saw south Africa s position in the Global Competitiveness rankings fall from 44th to 67th between 2007 and 2018. Relying on Government to try and spend us towards higher growth does not address these structural problems.

6 It also does not take into account that increased Government spending would entail higher borrowing costs, which in turn squeeze out spending on real goods, services and investment. Our debt service costs are already almost the same amount as our spending on justice and peace. On our current trajectory, in three years time we will be spending the same amount on servicing our debt as on education and health. Fundamentally, there is a mismatch between our income and our spending. In a low growth environment, fiscal choices become starker: reliance on tax increases can reduce growth substantially and spending more can actually decrease growth if it deters investment.

7 If no corrections occur, in a slow growth environment, we face even greater adjustments in three years time. The discussion paper we release today is an update of the discussion paper released by the National Treasury in August. It is a detailed examination of a number of structural reforms that could help to arrest the downward trend in south Africa s growth potential and competitiveness. As such, it is not intended to be exhaustive it is silent on a number of important aspects, including poverty and inequality. Not because these issues are not important, but because of intentionally narrow focus of the document. It quantifies the impact of the proposed growth reforms on Economic growth and job creation over a 10-year period based on a detailed study of how these reforms are likely to shift productivity, lower costs, boost exports and shift the economy onto a higher growth trajectory.

8 It is important to note that the numbers we present speak to additional growth of up to percentage points and up to a million additional jobs relative to a scenario in which none of the reforms were enacted. The modelling presented in this discussion document takes into account that policy choices are constrained. This is a critical fact of life: higher government spending must be funded from somewhere either from higher taxes (which takes money out of the economy) or greater borrowing (and subsequently higher borrowing costs). Equally, estimates of the growth impact from government spending must take into account the capability of the state.

9 The reforms are also intended to open up the economy in the interests of greater participation and correct skewed ownership patters. They will also help to lower the cost of doing business and the cost of living. In order to succeed, our structural reform agenda must not be considered as merely a list of things to do, but rather part of a continuous process to move south Africa to greater competitiveness and a more inclusive economy in line with this administration s priorities. Some of the ideas articulated in the document are new, some are not, but all are based on rigorous research and policy papers published by National Treasury, other government departments and public entities, academics and international agencies.

10 Key elements of the document have already been reflected in recent Medium Term Budget Policy Statements and Budget Reviews. It is a living document, meaning it will continue to evolve and is meant to continue the public debate and discussion. The revised discussion document forms part of a broader process that will lead to the development of an Economic Strategy for south Africa. Consultations within government and with stakeholders are ongoing I would like to thank the public for their enthusiastic response to the growth strategy and assure them that government remains committed to ensuring a better life for all.