Rethinking Fiscal Consolidation

South Africa’s economists and the business world suffer from herd mentality says Redge Nkosi. He’s the Executive Director and Research Head at Firstsource Money. You can catch him on Twitter @redgenkosi

South Africa’s economic and business establishments, whose weight of economic opinion has considerable influence on government policy, enjoy remarkable singularity of economic thought. Any public comment, debate or policy suggestion that deviates from their received wisdom is airily dismissed. Crude caricatures usually accompany such dismissal.
Consequently, there is reluctance to publicly raise views that appear inconsistent with the establishments’ paradigm, thus unwittingly stifling the much-needed intellectual economic debate in the country.

There is perhaps no better example of the establishments’ pervasive groupthink than in the area of national finances. They exalt with aplomb budget cuts, deficit reductions and wish for budget surplus. During budget speeches, economists, businessmen and politicians scramble for interviews; vying for budget areas where deeper cuts could have been possible so as to reduce the deficit and thus debt. The common refrain is “government must tighten its belt, like everyone of us”.

What makes this fiscal probity call sound even more credible, are the repeated trumpet calls and warnings by the IMF, the OECD, the World Bank and Rating Agencies for government to reign in expenditure.

Yet with every increasing round of budget cuts and structural reforms, the economy continues to sink and shrink, generating ever-increasing armies of the unemployed and the poor. Those who have a chance to be in some employ, debt peonage is the norm.

With an ANC that assumed power without a clear macroeconomic compass of its own, legitimacy is bought by appropriating the compass of these institutions and the establishments’, as its own. Despite religiously following these calls, the nation’s economic malaise embarrassingly continues. Yet, none stands back to question whether this groupthink is leading us anywhere.

Our malaise does not require fiscal consolidation and structural reforms as its cure, especially in depressed times like these. Austerity does not and won’t work. All talk about budget cuts, as espoused by these institutions and their local cheerleaders are as mendaciously ideological as are stuck in the gold standard era economic frameworks. Such delusional calls and warnings have no basis whatsoever in macroeconomics. The whole intellectual edifice behind these claims is bankrupt and long discredited. The microeconomic analogy of households and firms tightening belts does not hold true for governments. How can the whole nation be so misguided? Debunking similar calls, prescient economist Professor Steve Keen simply put it, “Austerity policies are nothing but kindergarten economics”.

By blindly following such defunct economics, the ANC has, invariably taken a political decision to create, at a grand scale, poverty and unemployment while escalating the already high costs of doing business and living. The savaged economy of Greece stands as the perfect example of what the troika’s (IMF, ECB & EC) fiscal consolidation and structural reforms can do to a nation.

The incessant decay seeping through the entire national fabric is being occasioned by these policies coupled with epochal leadership decay. The resulting jolt at the polls for the ANC portends yet ominous societal dislocations, if current economic course is not reversed. Perhaps smelling the rout, in a speech at a Johannesburg investment conference on 26 July 2016, Pravin Gordhan said, “What’s very clear is that austerity, which we in some parts of the G20 thought was absolutely necessary … is no longer the answer. In South Africa, as well, we have some austerity fans amongst our public commentators and its time to rethink”. Barely six months ago, the same minister was championing austerity policies in his budget speech, and the entire nation was in claps.

This was perhaps the most profound policy statement ever made by an ANC Government minister in two decades. Yet, it barely received comment by media or the economic establishment. Surprising? “South Africa cannot rely on austerity measures to reduce public debt and boost economic growth, as previously thought”, he added. The minister proffered no alternative to his governments’ baleful austerity policies. This mea culpa by government should have been roundly welcomed, instead deafening silence abound; a sign of nationwide cluelessness.

Elsewhere, whilst government issues a mea culpa for its macro-economically incompetent policies, the Reserve Bank, assumes the spokesman role for the OECD, intoning that structural reforms are necessary and must be urgently implemented. Sadly, there is no empirical foundation, none whatsoever, to arguments in favour of such reforms especially in a weak, deficient demand economy.

The alarming intellectual laziness among our domestic institutions and individuals is fodder for obsolete ideas and has rendered the nation to pervasive intellectual capture, which inevitably translates into policy or regulatory capture. Our failed development framework and thus the economic mess is the outcome of that.

What ails this economy is lack of aggregate demand. The binding constraints are equally on the demand side. Whereas medium to long term sustainable inclusive growth lies in the redesign of the macroeconomic framework, short- term remedies include but not limited to an urgent dose of non-inflationary debt free stimulus, followed by quantitative monetary easing injected into the productive sector.

The so called quantitative easing applied by the Japanese Central Bank, the European Central Bank, the Bank of England and elsewhere are in fact mere asset swaps whose primary target is the price of money (interest rates). They are no different from the monetarist approach of bank reserve expansion, monetary base expansion etc that have traditionally failed to stimulate economies. They have benefited banks and large portfolio investors. South Africa will need to rise beyond the groupthink rubric to serve the interest of its society. That includes directly injecting the money supply into the veins of the productive sector of the economy, including the green economy and the fourth industrial revolution. On the other side, due to poor domestic demand, strategic quantitative monetary easing should include reducing the tax burden on individuals besides money directly channelled to key social and economic infrastructure projects.

A non-inflationary debt free stimulus, which is one of the urgent remedies needed to lift this depressed economy is conceptually different fro the quantitative monetary easing. Elsewhere in the world, this has been given a rather infelicitous term “helicopter money”. This is a fiscal operation whose primary aim is to stimulate demand and thus grow the economy through a debt free issuance of money that could go to all manner of projects in the service of the public. Water, health, electricity, roads, schools and all manner of highly demanded yet lacking public services and products are some of such projects.

The Reserve Bank, which has relied on the ineffective tool of interest rates to grow the economy, has to move away from outmoded understanding of money. A new development model will rely on the Reserve Bank performing an incredibly important role. After all, both the quantitative monetary easing and the helicopter money, properly handled will not be inflationary but will certainly lift this sinking economy to new levels yet experienced since 1994.

Therefore perverse calls for fiscal consolidation, like those for structural reforms are indeed fallacious and thus culpable. In the apt words of Nobel economist Prof Krugman, “Structural reforms are the last refuge of scoundrels”.

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