Budget austerity ‘a victory’, but at what cost?

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NEWS ANALYSIS

Last week, the treasury flaunted the medium-term budget policy statement’s most credit-friendly highlights — the narrowing of the fiscal deficit and lower-than-expected debt levels in coming years.

But the proclaimed success of fiscal consolidation is somewhat eclipsed by what looks to be at least another three years of meagre economic growth, which will inevitably turn the heat up on future spending.

The glacial pace of South Africa’s growth underlines one of the major dilemma’s implicit in the government’s efforts to rein in public spending — that austerity comes at a cost to the economy.

The medium-term budget policy statement, tabled by Finance Minister Enoch Godongwana last Wednesday, shows that South Africa will not be spared the economic onslaught of the global downturn.

Pitfalls

The treasury has revised South Africa’s economic growth down to 1.9% in 2022, from February’s forecast of 2.1%. GDP growth is now expected to average a paltry 1.6% over the medium term.

To put the latter number into perspective, in the decade after 2010, in an economy reeling from the 2008 global financial crisis, GDP growth slowed to just 1.7% a year.

The policy statement emphasised the need to accelerate growth-enhancing reforms, especially to boost electricity supply. It also suggested that stable public finances will underpin economic growth, as the state avoids “the pitfalls of risky fiscal action that has led to currency depreciation and economic instability in a number of countries”.

The document flags the need for more investment in public infrastructure to support growth. Government spending on buildings and fixed structures is set to increase from R66.7-billion in 2022-23 to R112.5-billion in 2025-26. 

But Godongwana has made it clear that the treasury will continue to act with restraint. “What we are trying to do now is shift, but that shift is not going to be a quantum leap. It is going to be a journey,” he said in an interview.

In his 2020 medium-term budget policy statement, Godongwana’s predecessor, Tito Mboweni, stated that the country’s fiscal position is one of the central impediments to economic growth. A failure to reverse the deterioration of the public purse, he said, would inevitably lead to a debt crisis. 

“Fiscal consolidation means taking difficult decisions today that will affect all parts of society in the interests of building a prosperous future,” the then finance minister wrote in his foreword to the 2020 document, which was compiled during South Africa’s arduous recovery from the pandemic.

That document also sought to respond to contestation over the country’s proposed fiscal strategy, which at the time gave policymakers five years to return the public finances to a sustainable position. 

At the heart of the debate was austerity’s effect on economic growth. In 2020, the treasury acknowledged that there would be trade-offs in how much support the government could give to the economy in the short term.

The treasury cited research suggesting that South Africa’s fiscal multiplier — which measures the effect of government spending on GDP — is low, or possibly negative. A multiplier of more than one implies that an additional rand of government spending can translate into more than one additional rand of GDP.

Research by the South African Reserve Bank showed that the fiscal multiplier declined from 1.6 to less than zero between 2009 and 2019, as South Africa approached its fiscal limits.

The bank concluded that, because the multiplier is currently small, the costs of fiscal consolidation will be less harmful to growth than generally perceived.

Austerity

Economists on the left have been particularly critical of the government’s rush to bring about a primary budget surplus, saying that fiscal consolidation would continue a longer-term trend of austerity right when the economy is most in need of stimulus.

Zimbali Mncube, a budget and tax justice researcher at the Institute for Economic Justice, says the treasury’s fiscal multiplier argument is flawed, because it is based on the view that South Africa’s fiscal policy has previously been expansionary.

“They say that they have been spending, but it has not resulted in economic growth. But when you look, in real terms, at what they spend on goods and services, it hasn’t kept up with inflation. It hasn’t kept up with population growth.”

According to Mncube, the economy has suffered in the wake of a decade’s worth of budget cuts. Core expenditure as a share of GDP has plateaued since 2012, according to research by Michael Sachs, the former head of the treasury’s budget office.

Since then, Mncube points out, unemployment has risen, while total investment has declined.

The view that fiscal consolidation will eventually lead to growth is based on the perception that, by cutting expenditure to pay debt, the government will revive confidence in the economy, thus encouraging private investment. “But”, Mncube says, “since 2012, the exact opposite has happened.”

South Africa’s low levels of growth going forward may very well be viewed as symptomatic of a combination of harsh local and global economic shocks. However, Mncube says, those headwinds have only compounded the longer-term effects of austerity.

More infrastructure spending is a step in the right direction, Mncube said. But it needs to come alongside increased investment in public services. “To grow the economy, you need to invest in people. It’s not an integrated way of looking at the fiscal framework. It’s a lopsided view that sees infrastructures as an end in itself.”

The government’s fiscal consolidation policy is popular among ratings agencies, which have awarded the country by lifting its outlook. 

Falling apart

But, as Moody’s recently pointed out, constrained economic growth will exert pressure on the government to spend more, jeopardising the medium-term budget policy statement’s fiscal consolidation promises. A number of local economists echoed this sentiment.

Low growth and high unemployment have left many South Africans in an untenable position.

Dick Forslund, the senior economist at the Alternative Information & Development Centre, says people may not be able to bear the weight of the country’s failing economy for much longer.

“It is like the anecdote about the farmer who puts more and more load on the back of an old horse … And eventually the horse collapses, of course. When you near that point, you have to question what we are prepared to accept.”

The economy has already been hit by a number of unforeseen events, including the July 2021 riots in Gauteng and KwaZulu-Natal, wiping R50-billion off of the GDP. 

Since then, the high cost of living has lit a fire under trade unions, whick have embarked on and threatened strike action in key sectors of the economy, further risking growth.

To avoid another wave of riots, the government has extended the R350 grant to March 2024. But in doing so, it has made a potentially disastrous trade-off by choosing not to raise other social grants in line with inflation. 

“The social fabric is falling apart,” Forslund adds.

“This is not Europe where you are implementing this austerity policy. This is South Africa. You are starting out with a very fragile situation … There are so many factors at play here. The uncertainty is extreme. That should tell the government that they have to do something extreme to avoid austerity.”