Limit Government spending

Week one was the idea of doing away with cash money to radically reduce crime.

Week two was a constitutional amendment to give us the right to honest government by having the two biggest parties together agreeing on the appointments for the guardians of Justice positions.

Week three was the plan that government should not hold the title deeds of land that morally belongs to individual citizens and should sell unneeded state land to raise capital

Week four was a plan to radically cut company tax to leave more money in the hands of companies so that they can grow and create more jobs but announcing this several years before implementation to stimulate growth before the tax income reduction affects the fiscus.

Week five is another in the theme of growing the economy and creating jobs. We are not in the lucky position of already having a deep rich domestic market for any goods we produce. Logically, therefore, we cannot grow without more exports. Exports come from having cheaper labour (measured in dollars, the currency of trade) to produce a known good / commodity and / or higher quality or unique goods and / or natural advantages (better ore grades, shallower mines, uniquely suitable agricultural climate or unique minerals). That’s about it. Most of these translate to the dollar denominated cost of producing the goods. Another way of saying that is most of these relate to the dollar / Rand exchange rate. The weaker the Rand, the more we will sell (of EVERYTHING), the more our companies will grow and the more jobs we will have. Finally, the more taxes will be paid.  

The exception, the two areas where we have unique advantages (if we do not continue to squander them) are Manganese and tourism (more about these in subsequent blogs).

So, how do we weaken the rand (or more accurately, why doesn’t it weaken to realistic levels automatically).

What?

We must amend the constitution so that Government (at all levels and all SOE’s) may not borrow any money except for ring fenced project capital expenditure (and even that under strict rules).

Why?

1)              Think of this. If we export too little on average because our goods are not competitively priced, this means that the rand is inappropriately strong. If it were weaker, then all our labour and produce would become cheaper in dollar terms and we would sell more – thus creating jobs. The system of exports and imports and currency valuation should be self – regulating. If you buy more than you sell, then you buy more dollars (to pay for the goods) than you sell dollars (received from goods you sell) and so you create a surplus of Rands – so the value of the rand depreciates until your exports become more attractive.

2)              Why does this not work in practice (here and for example in the USA) – the answer is government borrowing. If we borrow dollars as a country – those must be used to buy rands which can be used here – creating a (false) demand for Rands and this then raises the value of the rand compared to the dollar – keeping our exports too expensive. An instructive fact is that the accumulated USA trading deficit since the 1970’s is almost exactly the same as the US Government debt.     

If Government doesn’t borrow – trade will self - regulate.

3)              When government borrows, it has a severe immediate negative effects on the economy. If government borrows from local banks, this reduces the capital available for companies to borrow to allow them to grow and thus create jobs. It increases the demand for capital by increasing the total amount of borrowing which then increases interest rates which must be paid by all companies on money they have borrowed and by all people on their mortgages and loans.

It also increases the extent to which banks must borrow from foreign banks. These dollars borrowed must be converted to rand, creating an increase in the demand (and thus price) of Rands as above. If government borrows directly from overseas banks, then the latter effects are immediate and direct.

5)              On an ethical level, the fundamental idea of government borrowing is to give something to the people NOW (before the next election) without having to take money (tax) from them to pay for it. This is government lying to the people. They are not giving extra goods or services to the people because of clever policies or priorities (i.e.: economising somewhere). The people and their children and grandchildren will in time have to pay for it. Is this the legacy we want to leave our children? Like any well-run household, we must live within our means.

6)              Even for capital expenditure, it is far preferable that government purchase a service that is required (such as to build and maintain a rail line for a certain number of years at a certain price) than that government borrow the money and spend it itself to build and maintain the line. If a private company borrows money to do this, they are under pressure to deliver the required service. If they do not, government (doing their proper role as referee of the game rather than player) can hold them to account and even cancel the contract if the terms are not fulfilled. If the state does the building itself and it is poorly done or poorly maintained, who is going to hold them to account?

7)              If we don’t grasp the nettle of national debt now, suffer the inevitable pain now, we will continue to gradual de-industrialise and become poorer and poorer. The harm of drinking too much alcohol is done imperceptibly while you drink, not when you suffer withdrawal when the alcohol is removed (the banks foreclose).

How?

The goal must be to budget a surplus every year (save for the bad times). This must not be just a primary surplus, but a true surplus after interest payments. The only exception must be for large ring - fenced capital expenditures required. These should be a separate section of the budget and be accompanied by a financing plan for them. They must require approval by a supermajority (2/3) in parliament as the long - term commitment of future interest and capital payments will quite likely affect multiple different parties who may form the government during the loan period.

Legally , this will require an amendment to the constitution as a simple law will not suffice as a future government can too easily overturn it.

This provision will need to be gradually implemented as it will be impossible to immediately achieve without crippling the state. This should not be a soft wish. A clear timetable with the goal of achieving first a balanced budget for non - capex expenditure before interest, then balanced including interest. A Balanced budget must be achieved within 5 years. A rigid timetable and plan will reap immediate rewards – our ratings will improve and all businesses and government itself will get better terms on money they need to borrow.

In order to achieve this essential goal, government will need to:

Urgently raise capital to reduce our debt by selling all unused or underused government property. Selling as many SOE’s as possible (some have considerable assets) – particularly those that have needed or soon will be needing bailouts or debt guarantees (which amounts to the same thing). The only entities which cannot be sold are natural monopolies such as the electricity grid, rail network and road network). Some cash can be raised by allowing private companies to operate and maintain these or parts of these for a period of years – allowing them to profit from them over that period.

In addition, we may need to draw down on the GFECRA.

Why not?

1)              What if we have a war and need to rapidly grow our defence force. The constitutional amendment can make provision that in the case of a national emergency, the section of the constitution can be overridden by a 2/3 majority in parliament.

2)              We may need government to inject a stimulus into the economy in the event of a world wide recession. Again, in this event, if it is truly necessary,  it should be possible for the government of the day to get co-operation from the opposition parties to achieve a 2/3 vote required to over-ride the constitutional limit.

3)              We need to spend more money now to improve education, healthcare and many other government services now. The first rule when you find yourself in a hole is to stop digging. Government have spent us into a deep debt hole and overspending more now will just mean that next year and every year we will need to spend more on interest and less on services. There are smart ways available for us to reduce government expenditure and raise capital outlined in these blogs – without exposing our most vulnerable poor to devastation.

Referendum

I would support a constitutional amendment limiting governments ability to borrow money.  YES/NO