Key concepts: Economic shocks, Austerity, Fiscal Policy, Covid-19.
Delivering arguably the most anticipated policy statement of the year, the Minister of Finance Tito Mboweni insisted “This one, aikhona! this one is not an austerity budget.” This comes after a debate sparked between Economists and Policy Makers alike in early 2020, about whether the government ought to pursue austerity to reign in government debt or expand fiscal spending to cushion the already frail economy against the harsh impact of the Covid-19 pandemic.
Every financial year, the Ministry tables the government’s budget policy statement outlining the government’s priorities and targeted spending towards them. In the wake of Covid-19, South Africa’s government has been faced with a challenge of how to combat the multi-sectoral effects of the pandemic on the economy, while trying to stabilize government debt and continue to fund the priorities that enable South Africa to function as a capable state.
These priorities include:
> Health
> Education
> Economic Development
> Social Security & Development
These priorities create a conducive environment that allows citizens to thrive and realize their goals, or simply to survive, especially in dire economic conditions. If this is the case, then why pursue austerity?
This policy stance is not uncommon. It has been pursued by economies globally and to varying degrees. For instance, in the wake of the Great Recession of 2007/8, countries in the OECD pursued this policy measure. Most recently, Greece was also prompted to implement austerity in 2019, following the consequences of adopting the Euro currency. The goal of austerity is to reign in debt and reduce the budget deficit. This can occur through tax increases and/ reductions in government spending. It is crucial, however, to note that this policy measure is not without caveats.
Although increasing tax rates and reducing government spending can improve the government’s budget balance, the former puts less money in the pockets of consumers, reducing consumer spending, the latter deepens social inequality and both lower aggregate demand. Ultimately, austerity results in low to negative economic growth, as it creates economic conditions that do not stimulate economic activity. Therefore, this measure is to be implemented only when the economic conditions allow the government to reign in government debt, while not hampering economic activity.
Fiscal Expansion, on the other hand, can occur through an increase in government spending and/ a reduction in taxes. The goal of this policy stance is to stimulate spending in the economy to foster growth or cushion economic agents against shocks such as the Covid-19 pandemic that reduce spending and lower economic activity. Thus, it can be argued that pursuing this policy stance has never been as crucial as it is now, more so given South Africa’s context of high inequality, poverty, and unemployment rates.
In his speech, the minister of finance tabled that the 2021/22 budget is not an austerious one. His argument is based on the decision not to increase taxes, but to grant relief to taxpayers through reductions in Personal Income and Corporate taxes. This stance, however, is also not without caveats. Tax reliefs reduce government revenue, potentially deepening the budget deficit. Also, when the government does not have enough funds to increase spending, it will need to acquire debt. As it stands, the SA government has numerous debt obligations towards foreign investors, domestic bondholders, insurance companies, local and foreign banks, pension funds, unit trusts, the Public Investment Corporation, and other financial corporations. It is only in 2025/26 that the National Treasury projects to stabilize SA’s debt-to-GDP ratio at 88.9%. In the words of the minister “We owe a lot of people a lot of money”.
In an era where unconventional policies have taken precedence, is there room for South Africa’s government to explore unconventional fiscal policy avenues to reduce the Debt-to-GDP ratio while not reducing spending towards its priorities?
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Yours in Thoughtful learning,
Mbali Shamu