The government’s response to coronavirus is going to leave SA with a huge fiscal hangover once the pandemic has run its course. What will happen then? Will the government institute austerity measures to halt runaway debt or listen to the left, which wants SA to spend its way back to health?
This debate between austerity (cutting spending to rein in borrowing and debt) and providing stimulus (spending more to boost growth) is going to rage in earnest in 2021, but the left has already shot out of the starting blocks.
First away was Wits lecturer Gilad Isaacs, co-director of the Institute for Economic Justice. Last week he urged the government to change tack: instead of continuing to cut budgets, it should undertake a fiscal expansion focused on upgrading infrastructure and pro-poor spending.
He draws support from a recent paper by Delft University of Technology researchers Enno Schröder and Servaas Storm. They found that for every R1bn the SA government spends, GDP increases by R1.68bn (a fiscal multiplier of 1.68) and 6,900 jobs are created. This means spending 6% of GDP (R306bn) would increase GDP by R513bn and create 3.5-million jobs.
If only it were that easy. The National Treasury believes SA’s fiscal multiplier is less than one, given that the economy is constrained by “supply-side” factors, including an inefficient logistics system (rail, ports, internet), insufficient energy supply, skills shortages, and overregulated labour markets.
Isaacs would have the government invest in things such as rail freight infrastructure to remove these bottlenecks, expand supply and boost demand. But this has been the government’s mandate since it adopted the developmental state model in 2004. It has failed outright. Just look at the state of Eskom, the Passenger Rail Agency (Prasa) and the rest of the state-owned enterprise (SOE) sector.
The truth is SA has little to show for the spending splurge of the past decade other than a spike in the debt ratio from 25% to 60%. This is because the money was spent on the wrong things (wages) and because the government’s spending efficiency is so low — SA spends proportionally more on education than most countries but has the worst education outcomes in the world.
The problem with austerity (tax hikes and spending cuts), as Isaacs correctly observes, is that it will be self-defeating if it causes demand to contract. In this case SA’s debt ratio could rise even further, as happened to Greece in the wake of the eurozone crisis.
This is why the Treasury has avoided major tax hikes in the recent budget and continues to run large deficits and allow some real spending growth, despite a decade of excess. But this is not what austerity looks like, despite the best efforts of people such as Isaacs to cast it as such.
Thanks to Covid-19, which has forced the executive to take a 33% salary cut, SA’s political elite is finally getting a taste of real austerity. It should expect more of it. The economy will be intensely fragile once the pandemic eases and requires extremely careful handling. There can be no more inefficient fiscal spending.
In any event, SA cannot wish away the growth-sapping effects of higher interest rates and the rising risk premium associated with its mounting indebtedness. SA’s debt ratio is screaming towards 80%, well beyond the high-risk threshold at which other emerging markets have experienced debt distress.
The solution is for government to stop viewing the SOE sector as the key driver of growth. SA urgently needs structural reform that lifts the dead weight of SOEs off the economy, lowers the cost of doing business and increases private sector participation and competition.
Given the state’s lack of capacity, and with every cent it borrows coming at exorbitant interest rates, the only route left for the government is to embrace a model in which it trims its excesses and partners extensively with business to go for growth. Nothing else can save SA now.
• Bisseker is a Financial Mail assistant editor.
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