ERSA’s Fiscal Futures webinar series (III)

23 October 2020

In this brief we cover the discussion around economic growth. Brief one introduced the themes and the participants and then the first two topics: Treasury and the South African Reserve Bank’s Response to COVID, and the fiscal deficit and fiscal sustainability. Brief two covered debt, including a presentation by Treasury. Brief four will discuss the credibility of South Africa’s financial institutions and complacency risk, and brief five covers the policy reforms which South Africa needs to make.

INTRODUCTION

One of the participants noted that a strong positive from the webinars is that there is an agreement among all the participants on how important economic growth is to policy making in South Africa. However, there were disagreements about increasing debt levels and the role government spending plays in spurring growth.

We will start with general observations, followed by the arguments for increased government spending and debt, then onto supply side issues (labour, network industries, business regulations, education and health), fiscal discipline and finally the points made by those who said that government’s debt level is too high.

GENERAL POINTS

The Bureau of Economic Research (BER) expects South Africa’s GDP to decrease 8% in the next three years, with a recovery in real GDP[1] per person by 2025. The worst affected are low income house-holds with both BER and Treasury saying that reforms are required.

Growth has decreased since 2011 because the issues with Eskom, corruption, government inefficiency, etc. have all resulted in operational government spending for which the country has not received any returns.

When the economy is doing well we are too optimistic and vice versa. As such, we will see a stronger recovery than expected because markets work.

Business Unity South Africa’s message is that we are an economy that needs foreign investment to grow, but for this year and for the first time we will run a balance-of-payments surplus (exports exceeding imports), with corresponding capital outflows.

If we cannot grow the economy with a young population, how will we grow it with an old one in thirty years?

We always talk about growth when comparing growth and interest rates, but maybe interest rates are too high.

THOSE IN FAVOUR OF INCREASED GOVERNMENT SPENDING AND DEBT

Municipalities have financial management issues and an improvement here will allow them to borrow better to invest in infrastructure.

Low debt, stable inflation and liberalised financial markets are insufficient to spur growth and we are relying on microeconomics (individual businesses) to do too much of the heavy lifting. Macroeconomic policy by SARB and fiscal policy by Treasury should complement each other where possible and correct market imbalances.

We need to transform the economy through increased industry diversification and labour intensity, and here fiscal policy can be used to create growth without increasing imports excessively.

SUPPLY SIDE ISSUES

According to one participant, what has been concerning in these webinars is the framing of the discussion as though South Africa is as developed as Canada, and that we can focus on small short-term demand management issues. Rather, we have deep structural and supply side issues which need to be addressed.

On the supply side of the economy, which includes labour, network industries, business regulations, education and health, South Africa’s ranking on the growth metrics is poor. Labour supply is constrained by shortfalls in service delivery in education and health. In fact, we have had decreasing growth capacity since the 1960s. The decrease accelerated in the eighties and per capita welfare has decreased every year since. The commodity boom of the 2000s distracted from this trend.

We have exceptionally poor labour absorption. Less than 10% of the population is employed in the formal private sector because the labour market cannot generate enough jobs and this has directly contributed to inequality. Furthermore, supply side issues have resulted in South Africa’s growth path to become unbalanced in that it is strongest in low productivity sectors.

These structural issues are also very difficult to address, because when they are addressed you will have losers and do you want to compensate the losers? If so, the demands on government’s budget can get very high.

FISCAL DISCIPLINE

While economists do not know fully what causes growth you can be sure that fiscal indiscipline kills it, because the country will not attract the necessary investment as a result. The “the only way we can grow is if government spends more” rhetoric is unrealistic and an unfair analysis of the situation. Stimulus through the fiscus is impossible because the space has been eroded, due to fiscal spending increasing aggressively since 2008 but with very low growth to show for it.

THOSE WHO SAY GOVERNMENT’S DEBT LEVEL IS TOO HIGH

With regards to current debt levels and growth, government debt is crowding out private investment which could spur growth, and economic growth is how you decrease the country’s debt to GDP ratio. It has been seven years since investment in our economy grew and business is waiting to invest. Investment took a major dive since 2019, for which the government is largely responsible. How do we turn this around when the country’s already low savings are being consumed by high public-sector wages and government debt interest costs? Post the global financial crisis of 2008, GDP growth has been led by consumption and services while fixed capital investment has been falling since 2015.

By Charles Collocott, Researcher, HSF, 23 October 2020