The ‘business confidence’ effect

Pieter Faber, Saica's executive of taxation

The Minister of Finance has, on numerous occasions, conceded that economic growth is the only solution to the country’s fiscal challenges and spending ambitions. However, in the last 15 years, the economic policy and its implementation has left some concluding that “having no plan seems to be the plan”. 

Similarly, various ministers have had to concede that infrastructure is the lifeblood of an economy, and South Africa’s ageing, stolen and failing infrastructure has the economy on life support. The National Development Plan had set a goal of gross fixed capital formation of 30% of GDP by 2030, which is five years from now. That’s R2tn at the 2023 GDP. 

The 2024 Budget clearly shows that the country is below 15% and has been continuously declining since South Africa changed its economic and fiscal policies in 2009.

So, does the data provide confirmation as relates to the correlation between business confidence and investment appetite as noted by UNCTAD? The South African Chamber of Commerce and Industry (SACCI) Business Confidence Index below clearly shows that business confidence increased steadily after the dawn of democracy, with business enjoying the fruits of a stable and positive economic and fiscal policy. However, the 2007 global economic crisis, together with the political change in economic and fiscal policy witnessed in 2009, has continued to dent business confidence, further exasperated by the Covid-19 pandemic in 2020.

It is not just capital investment that has tracked business confidence. The IMF economic growth data shows a similar pattern between 1994 and 2024. It took a few years to settle business confidence and, similarly, GDP growth, but by 2000, data showed growth in all the metrics, even outperforming world averages and advanced economies. Once again, all three metrics take a sharp decline after 2007 to 2009, and South Africa has unfortunately remained a perennial underachiever in GDP terms ever since.

SONA 2025 promised R940bn over three years in infrastructure spending. Context for business confidence is everything. For example, the 2019 National Water & Sanitation Master Plan estimated a funding requirement of R25bn in water upgrade backlogs and R332bn in failing municipal water infrastructure. We know today that this estimate is materially understated, with just the City of Johannesburg requiring an estimated R221bn to repair and upgrade current infrastructure (i.e. not even covering the cost of adding to or expanding its current inadequate infrastructure). Realistic, as opposed to token commitments by government, will be required to lift business confidence.   

The period between 1995 and 2007 was not just characterised by spending money that improved business confidence; in fact, it was the opposite. Success during this period was achieved as a result of a prudent government that promised and delivered on its mandate, doing so by fiscally living within its means and not under the ‘sword’ of debt. This is further supported by the fact that business confidence continued to decline from 2009, notwithstanding the government adopting “anti-cyclical spending” measures financed from debt, which would further expand during Covid-19 in 2020. What was also of importance was what the government was spending, as financed by the debt. 

It was not just the private sector that started disinvesting from capital infrastructure. Notwithstanding consistently growing tax revenues, the government started in 2009 to disinvest more and more from infrastructure, spending more on operational costs and “social expenses”. To put this into context, the budget of 1994 was a mere R105bn; in comparison, the 2024 budget revenue of R1.84tn would be equal to R559bn in 1994 (i.e. 5, fivefold what the first democratic government had to work with). 

Similar to what happened in 1994, South Africa has once again come to an economic crossroads, with its leadership needing to make difficult decisions as opposed to politically expedient decisions. However, things may be even worse as we now have a downturn in the global value chain, even more unequal technological advancements, geopolitical dynamics, regression in environmental concerns and a rise in nationalism. This, whilst facing a low-skilled working population, a 43% unemployment rate and embedded dependency of the majority of the population on social spending. 

Rebuilding together will require compromises and delivery by both government and business, though it is the government who will have to take the first steps to rebuild business confidence. As a country, we should not ignore transgressors but rather “deal with those to blame” later, as we need to focus on building an inclusive future for all our people now. It will not be easy; the people who ‘have’ may have to contribute more through more taxes, and the ‘have nots’ will have to wean themselves off unsustainable social benefit spending. ‘Business confidence’ will have to deal with these challenges, but locally, businesses and citizens alike need to be able to trust in a government that is able to deliver on promises of fiscal discipline and spending priorities that do not further create economic challenges and risks, whilst restoring the economic lifeblood of the economy.