Why Tito Mboweni’s austerity is bad for growth
According to StatsSA, South Africa is the most unequal country in the world , unemployment is at 32% and half of the adult population lives in poverty. These indicators have been exacerbated by the coronavirus pandemic and economic history teaches us that in times of a crisis, countries and central banks should spend their way out of a crisis to deal with the economic shock and stimulate growth back in the economy.
The South African government has done the exact opposite by embarking on a fiscal consolidation project, which includes plans to try to reduce the budget deficit from around 14% where it currently sits, to around 6% by 2024/25 by reducing government spending and “stabilising debt levels” to avoid a “sovereign debt crisis”. This is a catastrophic and poor response in a country that is desperate for economic stimulus to deal with gross inequality. To look at whether or not South Africa’s austerity is “good” or “bad”, we would have to explore and debunk half truths about the “sovereign debt crisis” and “budget deficit” concerns.
A sovereign debt crisis is when a nation cannot pay its bills, defaults on its debt and cannot serve its function, similar to what Greece experienced. Therefore, the idea that South Africa is headed to a sovereign debt crisis is very mischievous and one that is fuelled by political rhetoric, often looked at from a nominal, flat outlook and not through thorough and honest economic analysis. An example of the nominal and flat analysis would be when looking at the total debt, which is currently at R3.7 trillion. A laymen would ordinarily assume this to be negative because debt is seen as bad. However, the more appropriate instrument would be the famous debt-to-GDP ratio, which is often misquoted or poorly analysed.
When placed against GDP, one realises the debt-to-GDP ratio is at 80.3% – for every rand the SA economy produces, government borrows 80 cents – which again, many would be concerned about and predict a looming sovereign debt crisis . That would be dishonest, especially when we look at other emerging markets such as Singapore, Argentina, Brazil and India, which have much higher debt-to-GDP ratios than South Africa. They sit at 132%, 102%, 89% and 90% respectively. An even more bizarre example would be Japan, which has debt-to-GDP ratio of 236% . Therefore, a “high debt-to-GDP” is not enough to deduce or predict a sovereign debt crisis and is a normal practice across economies. It should only be of concern when countries don’t have economic growth, and even in the most extreme cases, governments do resort to lending from their respective Central Banks through a programme called quantitative easing to avoid defaulting on payments.
From an economic outlook, as long as a country’s GDP grows at a higher rate than borrowing interest rates and borrows in its domestic currency to mitigate exchange rate fluctuations (which South Africa does already, according to Treasury) and 90% of debt is denominated in rands and on the odd occasion, debt is in line with worldwide debt agreements. Other interventions, although not always advised, are central banks bailing the country out of debt, or they “print more money”. Consequently, South Africa’s Treasury can still afford its debt if they grow the economy through wide stimulus programmes with a focus on strengthening the domestic economy, driving up consumption in retail and other industries, as well as increasing domestic investment that will attract foreign direct investment. That can build and support capable industries that can compete in international markets. Exporting products in which we have a competitive advantage will allow South Africa to grow its GDP.
More importantly, the fixation with achieving a budget surplus during a time of a crisis to appease markets is quite an arbitrary compulsion and is certainly not going to assist dealing with the immediate and short-term economic challenges. Most, if not all, nations operate with a budget deficit, including powerhouse economies such as the USA, UK, Japan and Germany, as well as smaller and emerging market countries operating with a budget deficit. Therefore, spending more than you collect from taxes is a common, healthy fiscal position and is sometimes encouraged, especially in times of crisis and recession when government’s tax revenue collection is stagnant or falling and they have to spend more than they collect to improve growth.
The immediate question is, then, where has that worked? Historically you can look for two events that will enhance the idea that countries should spend during times of crisis. The first would be at the 1929 Great Depression, where USA President Roosevelt embarked on fiscal expansionary policy through initiatives such as the Works Progress Administration Jobs programme that created around 8.5 million jobs.
More recently was the 2008 financial crash, where US Treasury, through the Troubled Asset Relief Program bought $700 billion worth of dubious financial assets to bail out banks and avoid a global financial crisis, which had already left many economies devastated and in recession. This is where spending during a crisis through fiscal intervention from Treasury helped save millions of jobs.
In the South African context, a great example of fiscal intervention from national Treasury that should be celebrated is the COVID-19 stimulus response through the R350 grants intervention. It had close to seven million dependents. The presidential YES Jobs programme employed 300,000 people and had an immediate and real impact on the local township and rural economy as it boosted sales and consumption of local small businesses and provided immediate relief for consumers. South African Treasury should continue with that fiscal trajectory and turn the grant into a permanent Basic Income Grant, as well as extend the Presidential Jobs programme.
Evidently, countries should spend their way out of a crisis and not want to tighten their belts. South Africa is no exception
Bonga Makhanya is an activist and final year Bcom (Economic Sciences) student at Wits University. He is secretary of the Wits Rethinking Economics For Africa organisation, as well as secretary for the Wits Black Management Forum Student Chapter. You can follow him on Twitter.