After a decade of austerity resulting in low GDP growth and rising public debt, Minister of Finance Enoch Godongwana has delivered a maiden budget speech that dishes out the same failed economic policies. These will be in place for the next three years of the medium-term expenditure framework (MTEF) until 2024-2025. But the guaranteed outcome of more austerity and interest rate increases is rising levels of unemployment, poverty and inequality.
The most important number in the February 2022 budget is the GDP growth forecast. Almost everything – including employment, the size of the budget and the public debt ratio – depends on this number. If the economy grows at a faster rate, many things become affordable. We can begin to dream again about the kind of country in which we want to live. After more than a decade of no growth and soaring unemployment – the number of unemployed people increased by 6.5 million to 12.5 million between December 2008 and September 2021 – the National Treasury has forecast a GDP growth rate of 1.8% a year for the next three years.
This means the government does not believe that its own recovery plan and structural reforms will succeed in growing the economy. The World Bank and the International Monetary Fund agree. They have forecast GDP growth of 1.5% a year between 2022 and 2026. On this trajectory, assuming that the growth of the labour force and the relationship between GDP growth and job creation are almost the same as what they were before the Covid pandemic, the number of unemployed people will increase by 2.5 million to 15 million people in 2026. The expanded unemployment rate will increase to 49.7% from 46.6%.
But increasing GDP growth and reducing unemployment are not binding priorities for the treasury and the Reserve Bank. The 2022 budget was about relentless debt fearmongering and reducing the country’s debt-to-GDP ratio, which is not high by international standards, even when benchmarked against similar upper-middle-income countries. The idea that a country that issues its sovereign currency can go broke is absurd. According to the treasury’s ideology, its role is not to grow the economy. It must create the environment – a low debt ratio – for the private sector to grow the economy. The national budget operates like a household budget. The government must implement austerity measures – tax increases or spending cuts – to balance the books.
The Reserve Bank only cares about the inflation rate. Throughout the country’s worst recession in almost a century, governor Lesetja Kganyago talked solely about the inflation rate. Accounting firm PwC expects the bank to increase interest rates by 300 basis points over the next three years. If the two most important institutions in the economy are focused on other issues – debt and inflation – why is it a surprise that South Africa has never achieved the 6% GDP growth target in its National Development Plan? How can South Africa achieve this target if the state of the nation address, the national budget and the bank’s monetary policy statements never say anything about it?
Thumbsucks and windfalls
The word fiscal consolidation, another name for austerity measures, first appeared in the 2012 budget, when the treasury introduced an expenditure ceiling that limited the growth of non-interest spending. It started slowly, gathered pace and then the numbers started to get very large, especially in recent years. The logic of austerity is that public debt can be contained when there is a primary surplus – tax revenues that are greater than non-interest spending. In the 2012 budget, the treasury said it would narrow the primary deficit – the gap between tax revenues and non-interest spending – to 0.3% of GDP, which would allow the debt ratio to stabilise at 38.5% of GDP by 2014-2015.
The department said in 2013 that there would be spending cuts of R10.4 billion over the next three years. Each subsequent year, the government missed its debt targets and stabilisation timeframes, which were pushed forward. There were austerity measures of R41.8 billion in 2015, R73 billion in 2016, R54 billion in 2017 and R121 billion in 2018. The treasury increased the expenditure ceiling by R16 billion in 2019 to accommodate Eskom bailouts. The debt ratio would stabilise at 60.2% in 2023-2024.
The 2019 medium-term budget policy statement provided a clue as to why the treasury was missing its debt targets. “Over the past nine budget cycles, the government has overestimated GDP growth in its forecasts.” This explained the annual revenue shortfalls. There are two likely reasons for the poor GDP forecasts. With every budget, it was obvious that the treasury was overestimating – publishing a thumbsuck – about the contributions to GDP growth from its structural reforms. It was also underestimating the damage of the austerity measures to GDP growth. According to Keynesian economics 101, austerity is a self-defeating policy because it reduces GDP growth and increases the debt ratio. The rising debt ratio was owing to austerity policies, not overspending.
The department announced a R156.1 billion austerity budget in February 2020. Austerity measures would no longer include tax increases because they had not raised revenues in the weak economy. In April 2020, in response to the Covid lockdown, President Cyril Ramaphosa announced a R500 billion stimulus package, which was allegedly worth 10% of GDP. The treasury’s contribution to the package was a pitiful R27 billion, equivalent to only 0.5% of GDP. There was a R19.7 billion increase in non-interest spending during 2020-2021 compared with what had been budgeted for in the 2020 budget.
Direct tax relief was R7.3 billion. There were off-budget measures of R75.5 billion, equivalent to 1.3% of GDP. These measures comprised R18.2 billion that banks advanced as part of a R200 billion loan guarantee scheme and R57.3 billion that the Unemployment Insurance Fund paid to people who were unemployed because of the lockdown. The real stimulus was only R102.5 billion. The treasury announced a R264 billion austerity budget in February 2021 for the three years to 2023-2024.
In Godongwana’s 2022 budget, there is a bumper R469.9 billion main budget revenue overrun for the 2021 MTEF to 2023-2024 compared with what was budgeted for last year. This is owing to high commodity prices, which are set to continue. The windfall for the 2021-2022 fiscal year was R197.4 billion. Non-interest expenditure during the year was R63.1 billion higher than in the 2021 budget. The difference of R134.3 billion was used to repay debt. This means that only a third of the 2021-2022 revenue overrun was invested in the economy.
In his budget speech, Godongwana said: “We need to strike a balance between saving lives and livelihoods, while supporting inclusive growth. The budget presents this balance.” There is no such balance. The budget prioritises debt and the interests of bankers, while impoverishing the majority.
Austerity is anti-growth, as Nobel laureate Amartya Sen says. South Africa’s austerity policies will continue over the next three years to 2024-2025. After inflation, there will be a real decline in non-interest spending of 6.6% throughout the latest MTEF. The objective is to have a small primary surplus at the end of 2023-2024. This is based on an implausible forecast that non-interest spending will increase by only R29.4 billion in two years. The debt ratio will stabilise at 75.1% in 2024-2025.
Economist Dick Forslund says there will be real declines in spending on health, basic education and social protection of 11.8%, 7.1% and 12.9% during the next three-year MTEF.
The social wage, which includes these three spending items, will decline by 8.1% over the next three years. Public interest law centre Section 27 says: “The 2022 budget continues on an austerity path and fails to live up to government’s constitutional obligations by cutting basic education and healthcare funding. This will have negative and lasting impacts on basic education and health outcomes, worsen inequality and jeopardise government’s ability to fulfil its human rights obligations. According to this budget, the treasury is steadfastly committed to prioritising debt-servicing over human rights.”
After so many years of fiscal consolidation, there is no evidence that the policy can work. South Africa’s debt ratio has not declined. It has increased to an estimated 69.5% in 2021-2022 from 37.6% in 2012-2013. “If we want to reduce public debt quickly, austerity is not a particularly effective way of achieving this. For that, we need economic growth,” Sen says.
However, there is a scenario – high commodity prices generating another R500 billion windfall over the next two or three years – in which the government achieves its primary surplus. Would the treasury maintain fiscal consolidation, as it has done, despite the current windfall, because of a need to maintain the surplus and keep reducing debt? If so, it would become clear that austerity is a political choice, and that public debt has been weaponised for political ends to prevent progressive spending such as a basic income grant and a job guarantee.