Austerity budgeting is doomed to continual failure and suffering

by Dec 8, 2023Amandla 90/91, Article

By phasing in our fiscal consolidation over the medium term, we avoid the social and economic dislocation associated with more rapid adjustments while still stabilising the fiscal position without burdening the economy and future generations with excessive debt. Minister of Finance Pravin Gordhan 22 February 2012.

Our challenge is that rising debt services costs are crowding out important social spending, and our economy has not grown fast enough to support increasing expenditure or our current debt levels. Minister of Finance Enoch Godongwana 1 November 2023.

FISCAL CONSOLIDATION HARMS the vulnerable during rough times, stifles investment, and does not deliver debt sustainability. After 12 years of austerity budgets, South Africa has still been unable to achieve fiscal consolidation and stop the debt-to-GDP ratio increase, despite the vast social costs of austerity. It is time to try different approaches. 

Austerity a vicious circle

South Africa’s 2023 medium-term budget policy statement continues the current policy trajectory by setting unrealistic spending targets. Attempts at fiscal consolidation have mainly focused on containing spending with a sharp real contraction, frontloaded in the first year of the medium-term expenditure framework (MTEF). But slower economic growth and rising interest rates mean that debt service costs increasingly crowd out social spending. In response, austerity measures contribute towards lower aggregate demand, lower growth, rising inequality and a weakened state.

Meanwhile, the intense fiscal pressure on basic education, healthcare, social protection, the criminal justice system, and other critical public goods undermines the longer-term growth and development prospects.

Minister Gordhan argued in 2012 that, by pursuing fiscal consolidation, the South African fiscal position would stabilise and that it would do so without burdening the economy and future generations. This has proven to be completely false. According to the South African Parliamentary Budget Office, the strategy has not been successful.

Since 2012, spending growth has been brought to a halt in order to accommodate a dramatic rise in debt service costs. In real per capita terms, core expenditure (non-interest spending, excluding SOE bailouts) has grown at essentially zero. In fact, austerity measures have been ineffective in stabilising debt and are crowding out crucial social spending, as noted by the current Minister of Finance, Enoch Godongwana. 

However, the level of private sector investment in South Africa is around 20 per cent lower than before the global financial crisis in 2008, and Foreign Direct Investment has never reached much more than two per cent of GDP. South African businesses are unlikely to invest in the capacity to produce goods and services that average South Africans do not have the money to buy.

Duma Gqubula argues that South Africa’s economy has performed poorly: From 1994 to 2022, GDP per capita, an imperfect measure of average living standards, increased by 22%. By comparison, over the same period, GDP per capita growth in local currencies was 783% in China, 337% in Vietnam, 315% in Ethiopia, 285% in India and 216% in Poland.

In South Africa, GDP per capita in 2022 was lower than it was in 2007. In other words, the living standards of average South Africans have been declining in a country with the highest levels of inequality in the world. This has been accompanied by record levels of unemployment, poverty and gender-based violence. Inequality generates significant costs for society in multiple ways (health, crime, social cohesion), while vast concentrations of wealth in a few hands undermine democracy.

Reducing capital expenditure makes debt problem worse

As a result, South Africa’s continuing economic crisis is manifesting as a fiscal crisis. A group of prominent international economists argued that austerity policies implemented in Europe post the 2008 financial crisis “did not limit or shorten the [economic] downturn; they made it deeper and longer than it otherwise would have been.” They further noted that “the research department of the IMF now largely supports this conclusion”.

Every austerity drive hits one area of fiscal expenditure first and hard: public investment. Compared to other relatively inelastic government outlays, like grants and public sector salaries, this is the softest target of fiscal consolidation, on the expenditure side of the fiscus. The logic is that this will restore sustainability, ignite growth and allow consolidation to come to an end.

This approach is contradictory: if the government cuts spending, it reduces GDP growth, which results in a higher debt ratio. Just take the decline of South African public-sector infrastructure investment. Capital or infrastructure expenditure has an impact on communication, travel, logistics and the provision of services. According to Stats SA’s latest Capital expenditure by the public sector report, public-sector capital expenditure has steadily waned since 2016, declining by R82 billion. That represents a decrease of 29 per cent.

Furthermore, local government expenditure declined, with 148 of South Africa’s 257 municipalities cutting back on capital expenditure in 2020. A similar story can be told for public corporations, with capital expenditure declining by 42 per cent since 2016. Public capital expenditure has long been argued to be the engine house of employment creation, not to mention contributing an essential part of South Africa’s ecological transformation. 

By reducing public expenditure at a time when private expenditure is falling, the South African Government hastened the rate at which total income has diminished. South Africa must stand for sustainable growth, quality jobs, fairly shared prosperity, and an equal opportunity for all children regardless of gender, race, class or nationality.

The government’s current fiscal path stands for none of these. Profound change is required. A more considered and growth-orientated approach to fiscal consolidation is needed to support increased social and infrastructure investment and social support. That’s because the economic outlook has continued to darken, while questions are being asked about the National Treasury’s ability to credibly assess the government’s fiscal and economic position in the short term. It’s worth taking a moment to think about why the National Treasury’s forecasts are important.

Inaccurate Treasury forecasts a problem

Policymakers are credible when economic agents believe they will try and fulfil their policy commitments (as much as possible). Therefore, we expect that what the National Treasury announces will happen, with a reasonable margin of error and a certain likelihood.

In other words, credibility contributes to anchoring expectations. Fiscal policy announcements play an essential role in catalysing expectations and ensuring policy certainty.

Of late, the government has been unable to produce a credible assessment of the country’s finances. The Southern Centre for Inequality’s Public Expenditure Project has noted with concern the growing divergence between budget plans and their execution and the declining accuracy of tax revenue forecasts. The budget included a salary freeze; but this was never going to happen. Yet, pay increases for government employees have been held below inflation on the basis of the expectation of a budgetary freeze. There are attempts to roll back pandemic-related expenditures, such as the COVID-19 Social Relief of Distress grant and the Presidential Employment Stimulus. These attempts are supported by an approach that denies that funding is available for these interventions in future budgets.

But again, this approach is undermined when the budget is exceeded. Spending targets are set at unreasonably low levels in the annual budget. This makes them impossible to achieve without causing harm to service delivery. This further undermines the budget’s credibility.

Over time, a weakening of budget credibility can impact on a broader set of fiscal institutions, including fiscal authority, effective public administration and clear oversight and control of budgets. After 12 years of austerity budgets, South Africa has still been unable to achieve fiscal consolidation and stop the debt-to-GDP ratio increase, despite the vast social costs of austerity. Not to mention dismantling the social provisioning of goods and services central to the care economy. Thus, while government discourse suggests an eventual end to austerity, there is consensus that austerity “has become an enduring feature of living under neoliberalism: instead of being a means to facilitate a robust recovery, austerity is for [South Africa] the ‘new normal’”.

Alternatives to austerity

However, there are alternatives to austerity, even for South Africa. If the main argument for austerity is that there is no money for critical social investments, then the best response is to raise it.

This could be done through progressive taxation, such as taxes on corporate profits, financial activities, personal wealth, property, imports/exports, natural resources, and digital services. Another avenue is eliminating illicit financial flows, using government reserves, and adopting a more accommodating macroeconomic framework. Alternatives have been presented, and there are financing options that the South African government could exploit to increase critical socio-economic investment and catalyse sustainable and equitable growth and development.

Thokozile Madonko is a researcher managing the Public Economy Project of the Southern Centre for Inequality Studies at Wits University and an activist, poet and climate campaigner.

Owen Willcox is a visiting researcher in the Public Economy Project of the Southern Centre for Inequality Studies at Wits University and a macroeconomist who worked at the National Treasury for 11 years. 

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