SA heads to the polls at the end of May with parties that could win 80% of votes — the ANC and members of the DA-led multiparty charter (MPC) — in agreement on a mad neoliberal plan that could result in a law that entrenches the austerity policies that have failed since 2012 and ensures that fiscal policies are not subjected to rigorous democratic deliberation.
With an inflation targeting central bank and a new fiscal rule (or anchor), a new coalition government will not have the economic policy tools to confront the unemployment crisis. Instead of having real debates about the economic policies that are required to end hunger, parliament could be bogged down in pointless arguments about complex technical formulas that boil down to “finding the best way to starve the family to pay off the debt”.
Of all the daft inventions of economists, fiscal rules are probably the worst. They were developed to address an alleged “deficit bias” in government policies. The solution was to develop fiscal rules that put limits on either government debt, spending, revenues or the primary budget deficit (excluding interest payments) or a combination of these four indicators. But the targets were rigid and arbitrary, lacked flexibility to respond to emergencies and had an “austerity bias” — self-defeating policies that reduced investment and GDP growth, the denominator that is used to calculate the deficit ratio.
The result was irrational “pro-cyclical” fiscal policies, which forced countries to cut spending during recessions, yet many have continued to implement fiscal rules. Since 1960 the US has changed its debt ceiling 78 times. Since 1997 the UK has had nine fiscal rules. Since the turn of the century, Brazil has had four rules. The European Stability & Growth Pact — with targets of a 60% debt-to-GDP ratio and a 3% annual budget deficit — was suspended during the Covid-19 pandemic in 2020.
Lydia Prieg, head of economics at the UK-based New Economics Foundation, says fiscal anchors are arbitrary rules that don’t ensure the health of the economy. “Chancellors simply change their fiscal rules when they become too difficult to meet — they are a political tennis ball, not a tool of effective policy.”
SA implemented a fiscal rule, an expenditure ceiling, in 2012. When it did not work austerity 2.0 targeted a primary budget surplus — with non-interest spending kept lower than revenues in recent years — to pay off rising government debt. But the collateral damage has been huge and there has been an annual average GDP growth rate of 0.8% since 2012, decaying public infrastructure and soaring unemployment. The debt ratio has increased to 73.9% in 2023/24 from 35% in 2011/12.
The rising debt ratio is a symptom of a broken economy, and the real driver of this increasing burden is that the cost of debt is higher than the miserable GDP growth rate. But instead of directly targeting these two indicators, austerity 3.0 is looking to introduce a new fiscal rule, which will probably be based on targets for the primary budget surplus. The 2024 Budget Review said: “To chart a sustainable long-term path for the public finances, government will, after extensive consultation, propose a binding fiscal anchor.” In a recent presentation, the DA-led multiparty charter made a similar proposal.
There is a saying that “To err is human, but to persist in error is diabolical.” Austerity 3.0 — legislating a policy that has failed for 12 years and continues to suffocate a battered economy — will obviously not work. Economists Orsola Costantini and Servaas Storm say the austerity myth — that what is economically rational for an individual household will also be rational for an entire country and for its government — is plain wrong.
SA must ditch the austerity myth. The sustainable way to reduce the debt burden is to target the GDP growth rate. Treasury and the Reserve Bank must also implement co-ordinated policies that will reduce the cost of government borrowing.
• Gqubule is research associate at the Social Policy Initiative.
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