Former Treasury official Michael Sachs says unless SA makes clear political choices about how to restructure government spending and negotiates these with those who will take the pain of the decisions, it will be unable to extract itself from the fiscal hole it has dug.
The consequence of that will be a slow but inexorable decline.
Sachs, adjunct professor at the Southern Centre for Inequality Studies at Wits University, has written a paper on fiscal policy that will be published later in November in New Agenda, a journal of the Institute for African Alternatives edited by ANC veteran Ben Turok.
SA’s fiscal position was laid bare in October in the Treasury’s medium-term budget policy statement that showed a debt-to-GDP ratio hurtling towards 80% over the next decade and a budget deficit averaging 6% over the medium term.
Sachs explores the two main options put forward as solutions to SA’s fiscal crisis — a fiscal contraction and expansion — concluding that both will fail to solve the problem and that neither address the political constraints that bar closing the budget gap.
Trimming at margins
The predominant argument of conventional economists and credit ratings agencies is that SA should reduce public spending. Though this will lower demand in the economy, the argument is that it will be offset by private investors who will be encouraged by the government’s resolve to lower spending. This will enhance the government’s creditworthiness, and bond yields would fall, which would lead to falling interest rates for all borrowers and increased private investment. This in turn would boost growth and set off a new virtuous cycle of development.
Sachs says the difficulty is that the cuts in spending that would be required cannot be achieved by trimming at the margins — “actual reductions in the quality or quantity of public services, the size of social transfers, the pay of public servants or the rents distributed to small businesses through the tender system” are required.
For inflows to be sustained, the government would need a credible story about the future of economic growth that can convince the private sector that its increased spending will bear fruit
All of these entail “significant political costs” as they cannot really be achieved without “reducing the already low consumption levels of the African population”. This entails taking large political risks, of which there is no evidence the government is serious about taking.
The alternative option, favoured by the Left, is to expand government spending with more debt to stimulate the economy. But, says Sachs, the consequences of too much debt are already being felt through the system. Apart from those, “a debt-fuelled expansion” in a savings-constricted economy would have to rely on foreign savings, making the country more vulnerable to foreign outflows.
For inflows to be sustained, the government would need a credible story about the future of economic growth that can convince the private sector that its increased spending will bear fruit. As the fundamental constraint on investment in public infrastructure is political failure and institutional paralysis, rather than financial, there is insufficient evidence that expansion would have the desired effect.
Without the confidence of the private sector that fiscal expansion will bear fruit, it will be offset by a contraction in private investment.
The only way forward, argues Sachs, is for “sacrifices to be made by real people across a broad base, including the white elite, the black middle strata and public-sector workers”. These would need to be negotiated and the costs accepted by the parties.
“Until the country’s leadership gets real about the need for these sacrifices … and begins to negotiate how the burden should be distributed, SA is unlikely to exit from the current path of slow but inexorable decline,” he concludes.
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