If trend economic growth is declining, macroeconomic policy reinforces the decline, and monetary policy only seeks to stabilise cycles around an otherwise declining trend. If trend economic growth is declining, macroeconomic policy reinforces the decline, and monetary policy only seeks to stabilise cycles around an otherwise declining trend.
JOHANNESBURG – South Africa’s macroeconomic framework is contradictory. Instead of positioning the government to lead, and thereby crowd-in the private sector, the framework makes the government to be the follower and a sitting duck.
If trend economic growth is declining, macroeconomic policy reinforces the decline, and monetary policy only seeks to stabilise cycles around an otherwise declining trend.
The belief by policymakers that a macroeconomic framework with a contraction-bias is necessary to “restore investor confidence” represents the same view which reinforced the Great Depression of the 1930s.
Economic growth is projected to be 0.9 percent in 2020 and to average just above 1 percent over the next 3 years.
The government response is to cut spending by reducing public sector wages, which support household consumption. To keep the unemployment rate unchanged, the economy has to grow by at least 3.5 percent. These projections imply that government accepts that over the next 3 years, unemployment will continue to rise regardless of the proposed structural reforms.
In the 2018/19 year, South Africa lost 108 000 jobs, making it increasingly harder to achieve President Cyril Ramaphosa’s promise to create 200 000 jobs per annum.
The Budget suggests that it is better to allow unemployment to rise than to find unconventional ways to finance an expansionary, growth-oriented Budget. The projected 5.1 percent increase in spending is largely due to mounting interest costs, but the non-interest expenditure is projected to decline in real terms.
Primary government spending will be cut by R156 billion. The largest item is the public sector wage bill which, according to the Budget review document, has been relatively left unchanged since 2012.
The only point the Budget makes about monetary policy is that the SA Reserve Bank (Sarb) should remain focused on inflation.
The proposed cut in government spending will not assist, instead it will further reduce economic growth, slow down tax collection and widen the primary deficit.
The tax relief to households will not be sufficient to counter the contradictory effect on economic growth. The tax multiplier is smaller than the spending one while the tax relief is too marginal.
One of the major problems which create fiscal unsustainability is the least-mentioned pillar of the macroeconomic framework: financial policy.
Financial policy is about how government finances its Budget.
The interest rate that the government pays on debt is currently 6.5 percent and inflation is projected to be 4.5 percent, which means that the real interest rate that government pays is 2 percent.
The growth rate therefore needs to at least exceed 2 percent in order for the ratio of public debt to GDP to be stabilised.
It is therefore not surprising that, with the projected growth rate of just above 1 percent, the interest burden will cause the debt-GDP ratio to increase over time.
It also appears that there are large errors in the growth projections.
The tendency to underestimate tax collection is largely due to over-optimistic growth forecasts in the policy statements.
The government should not have cut the Budget that would reinforce recessionary pressures. What it could have opted for is an unconventional way to finance it. There is a need to refinance public debt to contain the unsustainable interest payments.
Mboweni could have announced a process to introduce prescribed assets to fund infrastructure to address the historical backlogs and to tackle inequality.
He could have also used his powers to directly approach Sarb to fund a portion of the Budget.
Since the onset of the Global Economic Crisis, there has been a decline in credit extension. Private commercial banks have been cautious not to lend for fear to defaults.
Mboweni could have instructed Sarb to open a credit facility for development finance institutions to drive credit extension where private banks fear to tread.
These, and other measures, are well within his powers and they show that monetary policy is not simply about inflation targeting. Monetary policy is broadly about creating and maintaining conducive credit conditions to support economic growth.
The idea of capitalising the infrastructure fund largely with private sector resources has long-term adverse implications.
The cost of capital will find expression in pricing from such infrastructures will not be affordable to many people, who earn low incomes.
There is an urgent need for unconventional ways to finance infrastructure on a large scale, aimed at decisively addressing historical inequalities.
If there is anything to be learnt from private-public partnerships on public infrastructure in South Africa, the e-tolls saga is a case to look at.
The two major positives to emerge from the Budget statement are the establishment of the State Bank and the Sovereign Wealth Fund (SWF).
To be truly developmental, the State Bank must have a special relationship with Sarb, and the SWF will have to be based on profits from mineral sales, particularly a reviewed royalty tax on all operations, and the 20 percent free-carry that the Mineral and Petroleum Resources Development Act says government should have in all new operations.
Chris Malikane is an Associate Professor of Economics at the University of Witwatersrand.