Austerity to trigger worst depression in a century
Government plans to pull the economy out of crisis will worsen our abysmal employment figures and plunge us into crippling levels of debt.
Author:
29 June 2020
Finance Minister Tito Mboweni’s horror show of an emergency budget will result in an increase in South Africa’s debt burden and plunge the country into a long depression – an unprecedented three-year decline in gross domestic product (GDP), the value of all goods and services produced in the economy. South Africa faces a dystopian future as the biggest dose of austerity in post-apartheid history will result in collapsing public services and rising levels of unemployment, poverty and inequality that will turn the country into an economic wasteland.
The day before the budget, Statistics South Africa released the Quarterly Labour Force Survey, which showed the scale of the unemployment crisis. During the first quarter of 2020, the number of unemployed people increased to 10.8 million, using the more realistic expanded definition that includes discouraged work seekers. The unemployment rate for African people was 44%. It was 48% for African women. In the Eastern Cape, the unemployment rate was 49%. Since the survey was conducted before the lockdown, it reflected what the South African Communist Party refers to as “the crisis before the crisis”.
Related article:
Between 2009 and 2019, South Africa had a “lost decade” in terms of economic development. GDP per capita, which takes into account the population growth rate, did not increase. As a result, the number of unemployed people has increased by 4.9 million since December 2008. Between 2015 and 2019, there were five consecutive years of declining GDP per capita. Before the Covid-19 economic crisis, there were two recessions in two years during 2018 and 2019. The economy was expected to have a third recession in 2020.
The Supplementary Budget Review, a National Treasury publication, which contains the economic analysis that informs the budget speech and state policy, made no reference to the unemployment crisis or what should be done to create jobs. Instead, Mboweni put on a show of deliberate scaremongering that was meant to convince South Africans that there was no option but to implement drastic austerity measures to balance the books. But a country’s debt-to-GDP ratio is usually just a symptom of and not the cause of an economy that does not grow. There is no tipping point at which a rising debt burden results in a collapsing economy.
The debt-to-GDP ratio
The Supplementary Budget Review said the country had a total debt of R3.3 trillion at the end of March 2020. This was equivalent to 63.5% of the GDP. After excluding state cash balances of R263.6 billion at the National Revenue Fund, South Africa had a net loan debt of R3 trillion. This was equivalent to 58.4% of GDP. There is no universe in which that was a high number. The world average debt-to-GDP ratio was 82%. Many of South Africa’s peers, middle-income countries such as India (69.8% of GDP) and Brazil (88%), were in the same boat. In Africa, Egypt (92.6%), Angola (80.5%) and Mozambique (110.5%) were in a worse situation.
The International Monetary Fund (IMF) says world GDP growth will plunge by 4.9% during 2020 in the wake of the economic devastation caused by the lockdowns that countries introduced to delay the spread of the coronavirus. As a result, countries have implemented stimulus packages worth almost $11 trillion, which has resulted in the biggest borrowing spree in history according to the IMF. This is equivalent to about 13% of world GDP.
The IMF says: “Under the baseline scenario, global public debt is expected to reach an all-time high – exceeding 101% of GDP during 2020-2021 – a surge of 19 percentage points from a year ago. Meanwhile, the average fiscal deficit is expected to soar to 14% of GDP in 2020, 10 percentage points higher than last year.” South Africa’s debt-to-GDP ratio is expected to increase by 18.3 percentage points, the same as the global average increase, to 81.8% of GDP. In relative terms, when compared with its international peers, South Africa’s debt burden will be exactly the same as it was before the crisis.
Related article:
In an interview with Trevor Noah, Gita Gopinath, the IMF’s economic counsellor and head of research, explained the rationale for the global stimulus packages. Countries were faced with two options. First, they could do nothing and the debt-to-GDP ratio would soar. A deep recession would provide two simultaneous blows to a country’s budget. There would be a collapse in tax revenues, because of the recession. This would result in an increase in debt. There would also be a collapse of GDP, the denominator or bottom half of the debt ratio. A higher level of debt and a lower GDP would result in a soaring debt ratio.
The second option would be to implement a large fiscal stimulus worth billions of dollars. Under this scenario, a country would be better off than if it did not spend anything because a properly designed stimulus package can limit the decline in tax revenues and GDP. Busi Sibeko, an economist at the Institute for Economic Justice, says: “A well-spent fiscal stimulus can pay for itself by generating GDP growth. There are many ways of financing such a stimulus.”
Austerity
In his budget speech, Mboweni quoted the Christian apostle Matthew who said: “Enter through the narrow gate. For wide is the gate and broad is the road that leads to destruction, and many enter through it. But small is the gate and narrow is the road that leads to life, and only a few find it.” South Africa has chosen the path of austerity, a third dangerous option of tax increases and budget cuts that will take the nation through the broad gate of economic destruction.
Yanis Varoufakis, a former Greek finance minister, says a national budget is different from a household or company budget. In a household, there is a “splendid independence between spending and income”. But a country’s total spending is equal to its total income. When a country cuts spending, GDP (or national income) goes down. The debt-to-GDP ratio goes up. “Austerity is a failed policy. It always fails. It has never worked and will never work. In every country in Europe where austerity was practiced the debt-to-GDP ratio ballooned,” he says.
Mboweni’s budget effectively cancelled President Cyril Ramaphosa’s R500 billion stimulus package, allegedly worth 10% of GDP, which was announced on 21 April 2020. The original stimulus package had two components. The above-the-line (on-budget) expenditures that went through the national budget were worth R260 billion. The below-the-line (off-budget) expenditures were worth R240 billion. The on-budget items were job creation and the development of small and medium enterprises (R100 billion); various tax measures (R70 billion); social grants (R50 billion); municipalities (R20 billion); and public health (R20 billion).
Related article:
However, when he presented his budget, Mboweni reduced on-budget spending on the stimulus to R145 billion. A stimulus refers to new spending to boost the economy. Reprioritisation of existing spending does not count. “This was an emergency budget of smoke and mirrors. For every place where money was added, it was taken away from where it was really needed,” Sibeko says. After planned budget cuts of R101 billion, new spending into the economy was only R36 billion, if one excludes interest payments. The state contribution to the stimulus is only 0.7% of GDP. The new budget cuts are in addition to the R261 billion that was slashed from government spending plans during the February budget.
In the emergency budget, National Treasury slashed the R100 billion the president had said would be spent on job creation to just R6.1 billion. It was not explained what this money would be spent on. The president had said R50 billion would be spent on social grants. But only R25 billion was new money. The rest was a reallocation of existing spending within the Department of Social Development. The Budget Justice Coalition (BJC), which represents organisations that seek to build people’s participation in budget processes, outlined Treasury’s application of austerity to the inadequate humanitarian response to the economic crisis through higher social grants.
While the president promised a R500 top-up to the child support grant per child, National Treasury said it would be paid per caregiver. This saved the state R13 billion but resulted in at least seven million children continuing to live below the food poverty line. The R350-a-month Covid-19 grant was costed at between R17 billion and R20 billion. But National Treasury has reduced the budget item to R10.3 billion, allegedly due to low take up. But the real reason was exclusionary eligibility criteria, which reduced the number of beneficiaries, and the inability of the South African Social Security Agency to process applications, the BJC says.
Related article:
The president said R20 billion would be spent on municipalities. But only R7.4 billion was new money, according to Sibeko. He also said R20 billion would be spent on public health to fight the pandemic. But the health budget increased by only R2.9 billion. “In the context of a health pandemic, we have hardly increased spending,” Sibeko says. Elsewhere, there were large budget cuts in transport (R4.6 billion); agriculture, land reform and rural development (R2.4 billion); human settlements (R2.3 billion); and basic education (R2.1 billion).
The Supplementary Budget Review says the main budget deficit will increase to R709.7 billion at the end of 2020/21, which is equivalent to 14.6% of GDP. State debt will increase to R4 trillion, which is equivalent to 81.8% of GDP. Net loan debt will be R3.8 trillion or 77.4% of GDP. National Treasury presents two scenarios for public debt. Under the passive scenario, in which the country continues on its current trajectory, the debt-to-GDP ratio soars to 140.7% in 2029. Under the active scenario, which involves austerity and structural reforms, the debt ratio stabilises in 2024 at 87.4% of GDP, after which it declines to 73.5% in 2029. Structural reforms are measures to improve the supply (or production) side of the economy by removing institutional and regulatory impediments to the functioning of free markets.
Economic depression
The National Treasury has forecast a 7.2% decline in GDP in 2020. It says the economy will grow by 2.6% in 2021 and 1.5% for the next two years. But the National Treasury’s GDP growth forecasts have been wrong every year for the past decade. Each Budget Review is a copy and paste of the previous one. They all overestimate the impact of vague structural reforms on GDP growth and wish away the negative impact of austerity on the economy. The Supplementary Budget Review is no different from its predecessors.
Under the active scenario, there will be a primary deficit – the budget deficit excluding interest payments – of 9.7% of GDP in 2021. The target is to achieve a primary surplus by the year 2024. This astonishing turnaround of state finances – of almost 10% of GDP – to be achieved in only three years will require unprecedented levels of austerity. There will be tax increases of R25 billion between 2021/22 and 2023/24. Treasury says: “Spending reductions of R230 billion are required in 2021/22 and 2022/23, followed by further reductions in 2023/24.” There will be a raft of austerity worth R592 billion over the next three years, after including the budget cuts of R362 billion planned for this year.
Implementing such drastic austerity measures in the context of the worst economic depression in a century will result in an even larger GDP contraction during 2020 and prolong the recession over the subsequent two years as the National Treasury sucks billions out of the economy to repay debt. This will result in a higher debt-to-GDP ratio. The unemployment rate could increase to more than 50%, at which point our society will become unviable. We are witnessing the pre-shocks of a crisis that has the ability to eviscerate the dreams of our liberation. To enter the small gate to the narrow road that leads to life, South Africa will have to ditch its irrational pursuit of austerity and implement the large stimulus package that the country needs.
