Contractionary fiscal consolidation vs expansionary fiscal stimulus in the context of SA's budget

Occasional Paper 10/2022

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by Robert Mopp & Daryl Swanepoel

Contractionary fiscal consolidation vs Expansionary fiscal stimulus in the context of SA's budget

Implications for growth, employment and debt

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This essay will first look at austerity as the policy that gained currency in the post-2008 Global Financial Crisis (GFC), particularly in the United Kingdom (UK), Greece, etc. The counter policy of fiscal stimulation has a much longer genesis that can be traced to the Great Depression era. In the stimulus versus austerity debate, there are also shades and overlap between the two approaches. Both have pros and cons and should be viewed against the background of South Africa’s current fiscal and economic situation.

South Africa’s fiscal space has shrunk due to low growth, but there has been an improved revenue intake from higher commodity prices, resulting in a much improved main budget deficit for the 2022/2023 fiscal year, compared with the national budget presented in February. The main budget deficit narrowed to R42.7 billion in August, from R129.5 billion in July. This has provided additional space in the upcoming Medium-Term Budget Policy Statement (MTBPS) in October – giving Treasury additional wiggle room.

This essay advocates for a more gradual decrease of the budget deficit, as opposed to the current plan of higher levels of cuts. This should be in conjunction with structural changes to the economy to spur higher and faster growth, with infrastructure spending kick-starting the process.


Joseph Schumpeter reminded us in 1934 that "public finances are one of the best starting points for an investigation of society; the budget is the skeleton of the state stripped of all misleading ideologies, the truest reflection of the distribution of power and influence”. It is where the governing party shows its prowess and resolve to grow the economy sustainably and improve the quality of people’s lives. Former President Mbeki further elaborated on this profound observation in his 2006 SONA address, when he said that “the spirit of a people, its cultural level, its social structure, the deeds its policy may prepare, is written in its fiscal history”.

Professor Ben Clift (2018) asserts that austerity remains the central economic policy debate of our age; it goes to the nub of the issue under consideration. Over the last few years, this has become the case for South Africa too. He continues by asking how far governments should contain public spending, given increasing fiscal deficits and debt levels. Clift further asks, what should be accorded the highest priority: “reducing national debt to secure economic credibility or using fiscal and other policy levers to bolster economic growth”?

This summarises the tension at the heart of the budget, namely contractionary “fiscal consolidation” versus an “expansionary fiscal policy”. These posers are pertinent to South Africa, in light of the upcoming budget statement by the minister of finance and “austerity by stealth”, which many say has been integral to the budget over the last period.

This stance should be viewed against the current worsening global economic climate – after the two years of Covid-19 restrictions and initial recovery experienced in 2022 – of high inflation (high prices); high food and energy prices (accelerated by the conflict in Ukraine); glitches in the global supply chain mechanisms; de-globalisation and rising economic nationalism and the retreat into regional economic and political blocs; rising protectionism and trade barriers; deflation; stagflation and hysteresis (which increases long-term unemployment).

It should also be seen against the increasing decoupling of the USA from Russia and China, ushering in a new “cold war” – seemingly at an end with the dissolution of the USSR, finding expression in Francis Fukuyama’s now famous axiom, “the end of history”. This maxim noted that the liberal-democratic system has triumphed, with no rival paradigm to challenge it. Predictions are that these challenging economic issues are not transitory, but will be medium to long term in nature. Currently, the world faces an unprecedented “cost of living crisis”.

Fiscal Consolidation (Austerity) versus Fiscal Expansion

Austerity is often couched in the understated and misleading term of “expansionary fiscal contraction”, which will ostensibly lead to increased growth levels, resulting in more jobs being created and the attendant positive outcomes. Austerity opponents state emphatically that this is not the case, based on empirical evidence dating to the 1930s (Germany then) and post-2008 Global Financial Crisis, in the European Union (EU). This debate also references the notion of Keynesian “countercyclical” economic measures, especially in crisis periods.

Genesis of the Austerity Idea

The austerity doctrine has a long genesis, dating back to philosophers and the classical economists. It can be traced to David Hume and Adam Smith in the 17th century, with John Locke, the antecedent. Blyth notes that the sentence, “the state: can’t live with it, can’t live without it, don’t want to pay for it” defines the liberal dilemma as the basis for austerity politics. Locke wanted to limit the attitude and ability of the state to increase debts at will. At that time, this was mainly directed at kings who arbitrarily taxed subjects for their vanity projects and to wage wars.

Hume went further with his assertion that public debt can destroy a nation; again, to be seen within the context of monarchs with their unbridled power. In the modern era, there are checks and balances in place to counter this type of arbitrary exercise of power. He believed that the problem of public debt is unsolvable and potentially limitless; he also believed that debt can be passed on from generation to generation.

According to Blyth, Adam Smith deduced that the free-market system would not survive if a country was not prepared to make certain sacrifices. Smith, as a notable abstemious person, had a very high opinion of “saving as an actuator” (Blyth, 2013). For Smith, a cardinal problem is that states are not savers, individuals are. These three theorists approached cost (debt) from a moral perspective – to them, saving is a virtue and spending is a vice.

Later theorists associated with the neoclassical economic paradigm associate Smith with assigning a minimalist role to the state, the so-called “night watchman” role referred to in his 1776 classic, Wealth of Nations. According to Reisman (1998), Adam Smith “was not a single-minded advocate of a laissez-faire market in which the minimal state had no more than a protective function. Rather, he was a pragmatic social thinker who in each case selected the tool that was the best suited to his meta-objective of rapid economic growth”.

Thomas Malthus, another classical economist, argued in favour of the need to maintain aggregate demand and to support key sectors of the economy. He greatly influenced Keynes. Malthus is referenced by Keynes as the “grandfather of his theory of effective demand” (Skidelsky, 2003). In 1930, Keynes warned the establishment of a rising disaster, if they continued on the path of an unbridled free-market, gold-standard orthodoxy and fiscal and monetary policy austerity. As it turned out, shrinking markets and balanced budgets exacerbated the unemployment problem, which remained obstinately high, leading to the 1929 stock market crash and the “Great Depression”, and, ultimately, war amongst nations in Europe. This scenario came to bear once more in 2008 with the Global Financial Crisis.

Austerity Definition

Professor Mark Blyth defines austerity as a “form of voluntary deflation in which the economy adjusts through the reduction of wages, prices, and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budget, debts, and deficits”. Its adherents believe that it will inspire “business confidence”, since the government will either be “crowding out” the market for investment by amassing available capital through the issuance of debt, or adding to the nation’s already considerable debt, which they regard as too large and unsustainable in the long term.

For Blyth, the goal of the exercise goes beyond a mere reduction of the fiscal deficit or public expenditure; it also aims to enhance competitiveness. Barry Ritholtz describes austerity as “the desire to slash government spending and cut deficits during a time of economic weakness or recession” (Andor, 2018).

Professor Joseph Stiglitz, former World Bank Chief Economist and one of the critics of fiscal consolidation, compares austerity with an obsession with balanced budgets and a fixation on fiscal deficits. Stiglitz makes it clear that the main problem with the approach is that it makes cuts in expenditures (especially social spending) a policy priority when public revenues fall at a time of an economic downturn (what we are experiencing currently). Austerity measures refer to procyclical interventions during an economic downturn or recession, as opposed to fiscal stimulus measures that stress countercyclical measures.

Treasury View and Neoclassical Economics

The policy of fiscal consolidation, small government and balanced budgets is associated with the neoclassical economic framework. The neoclassical school posits that market economics have an automatic tendency to full employment equilibrium, are efficient and generally function well (Stiglitz, 2014). This school further believes that markets are more efficient than governments in allocating capital; state spending and taxes should be kept as low as possible; and budgets should be balanced (Skidelsky, 2020). Left to its own devices, the market would not provide the above, as we witnessed with the 2008 Global Financial Crisis and with the downturn occasioned by the Covid-19 pandemic.

New Consensus Macroeconomics, which replaced the New Keynesian synthesis as a dominant framework in central bank and finance minister circles, has a long history and many labels, according to Blanchard (2009). Perhaps the earliest popular term to describe its essential character, is the “Treasury View” – a term attributed to Keynes when he was employed here. Keynes was critical of Churchill’s defence of austerity in the beginning stages of the Great Depression.

Two major features define the Treasury View: reduce the public debt, and the budget deficit as a percentage of GDP at all times. Padayachee describes the Treasury View as predicated on “fiscal restraint/conservatism, low budget deficits, holding down expenditures and public debt, tightly controlling and directing the public purse and sound money”. It became synonymous with the Washington Consensus. The argument is that such austerity will not adversely affect the economy, but rather that the opposite will happen, as government cuts will be met by increased private-sector spending. Increasing the budget deficit will, in this view, “crowd out” more productive private investment and should be strongly discouraged.

The neoclassical doctrine of “expansionary austerity”, of cutting public expenditure and reducing budgets, is largely associated with the work of Alberto Alesina, a Harvard economist. Alesina used statistical techniques that supposedly identified all large fiscal policy changes in advanced countries between 1970 and 2007, and claimed to find evidence that spending cuts, in particular, were often “associated with economic expansions rather than recessions”. The reason advanced is that spending cuts create confidence (business), and that the positive effects of this increase in confidence trump the direct negative effects of reduced spending and exclude the possibility of any revived inflationary pressures.

Inflation is currently at record highs, globally. However, the evidence does not bear this out under all circumstances and conditions. The 2013 Economic Report of the President, produced by the US President’s Council of Economic Advisers, notes that where states have pursued the economics of austerity, the result has been continually declining growth. In contrast, the US, Australia, etc., experienced positive economic growth. Similarly, the social democratic welfare states with the biggest levels of fiscal stimulus experienced the least loss of jobs and economic contraction during the Covid-19 pandemic, with accompanying massive global economic downturn.

Reinhart-Rogoff Controversy

In 2010, two well-known Harvard economists, Carmen Reinhart and Kenneth Rogoff, claimed in their now infamous paper, Growth in a Time of Debt, that 90% debt is a critical threshold; that once debt reaches more than about 90% of GDP, the risks of a large negative impact on long-term growth become highly significant. George Osborne, the then British Chancellor of the Exchequer, and many other finance ministers in the developed world, seized upon this conclusion to justify spending cuts and sharply lowering government debt.

Three economists, Herndon, Ash and Pollin, from Amherst-Massachusetts, in a critique, replicated the Reinhart and Rogoff analysis and discovered a crucial spreadsheet error. When corrected, they came to the conclusion that growth rates in fact averaged 2.2%, not -0.1%, over the same period for the same group of countries. In their conclusion, they said: “In particular, it has established that policymakers cannot defend austerity measures on the grounds that public debt levels greater than 90% of GDP will consistently produce sharp declines in economic growth.”

According to Professor Eric Widmaier (2013), in mistakenly characterising the historical relationship between rising debt and falling growth, Reinhart and Rogoff inadvertently omitted strong performers like Canada, New Zealand and Australia from their calculations. Widmaier continues by saying that more important, however, than their spreadsheet errors, was their “lack of theoretical insight, as they failed to recognise that the relationship is best seen as one of reverse causality: rising debt does not cause falling growth, so much as falling growth causes rising debt”.

Subsequently, in 2013, Reinhart and Rogoff stated, “Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists. Given the likelihood of continued weak consumption growth in the US and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession.” Despite their erroneous calculations and subsequent partial volte-face, the Reinhart and Rogoff paper remains highly influential in the United States and Europe, and even in developing countries in the Global South.

New Deal’s State-Led Approach

In contradistinction to the fiscal consolidation approach, is an expansionary fiscal approach, undergirded by an effective, capable state. The New Deal, under former President Roosevelt, is regarded as a highly successful state-led economic development to counter the Great Depression travails. Roosevelt took America off the gold standard, devalued the dollar and targeted growth and development (Rauchway, 2015). He further targeted what was seen as the biggest challenge at that time, namely “deflation” (decrease in the general price level of goods and services) and secured a sustainable economic recovery.

President Roosevelt was advised by Keynes – some budget items were cut, but overall spending was up. Massive public works programmes were created during this time. When asked if he intended to balance the budget, he responded thus: “It depends entirely on how you define the term, ‘balance the budget’ … We will balance the budget as far as the ordinary running expenses of the government go. But fighting the Depression required borrowing, to put people back to work and keep human beings from starving in this emergency. As desirable as a balanced budget might be, the needs of recovery come first” (Rauchway, 2015).

By all accounts, the measures taken with the New Deal were a resounding success; growth was high, about 9% on average (Rauchway, 2015). Most scholarly accounts will concur with Keynes’s observation that “the extent, variety and spread of the recovery is outstanding in economic history” (Rauchway, 2015).

Stimulus or Expansionary Fiscal Spending

Evidence and results from the Great Depression and the 2008 Global Financial Crisis demonstrate that for fiscal stimulus, the “most effective way of cutting deficits is to resist recession and to combine deficit reduction with rapid economic growth” (Sen, 2015). Furthermore, Roosevelt’s words that, “as desirable as a balanced budget might be, the needs of recovery come first” (Rauchway, 2015) also apply in the context of expansion versus contraction.

From the mid-1940s to the mid-1960s the public debt to GDP ratio was considerably larger in Britain than it has been at any time since the 2008 financial crisis, with high growth rates. Britain was also establishing its welfare state at the time, developing a foothold for the welfare state in Europe, and then globally. According to Sen, Britain’s debt to GDP ratio in 1948 was more than 200%, more than double what it has been over the last two decades.

Keynes is credited with advocating for countercyclical fiscal measures to counter unemployment and low growth, rather than the procyclical approach followed in South Africa. Keynes famously said that the “boom, not the slump, is the right time for austerity at the Treasury” (Skidelsky, 2003).

In his General Theory in 1936, he suggests that cutting public expenditure is a problem, rather than a solution. Keynes introduced the notion that “demand is important as a determinant of economic activity, and that expanding rather than cutting public expenditure may do a much better job of expanding employment and activity in an economy with unused capacity and idle labour”. Many have misinterpreted Keynes’s point, saying he advocated reckless spending. However, Keynes was mindful of the context of spending, but within the broader framework of the macro economy. It was about the collective will of all stakeholders to deal with the challenges.

Austerity does not assist the recovery process, as cutting public expenditure “adds to the inadequacy of private incomes and market demands” (Sen, 2015), leading to higher levels of joblessness. Most of the stimulus packages to counter the 2008 Global Financial Crisis were replaced by austerity packages in most of the developed countries. Sen said a “hybrid policy of somewhat weakened fiscal austerity with monetary expansion” then came into play, with mixed responses.

South Africa’s Disquieting Political Economy

South Africa has its own unique socio-economic challenges, characterised by high levels of unemployment, poverty and inequality. We are regarded as one of the most unequal societies in the world. World Bank data that has measured the Gini coefficients of 146 countries since 2010, indicate that South Africa had the worst score, of 63.

Unemployment stood at 34.9% in Q2: 2022, according to Stats SA. The aftermath of the 2008 Global Financial Crisis saw South Africa lose about one million jobs, only replenished on the eve of the outbreak of the devastating Covid-19 pandemic. A bigger number was subsequently lost in 2020, mainly recovered in 2021.

In 2012, South Africa adopted the National Development Plan (NDP) 2030, which sets out a long-term vision for the country on how it intends to bring about fundamental socio-economic transformation. The aim of the NDP is to attain an ever-improving standard of living for all South Africans, through higher economic growth and the reduction of poverty and inequality. The NDP set a number of ambitious targets that have by and large not been met by the actual outcomes (NPC, 2020).

Given the devastation wrought by the Covid-19 pandemic – due to the lockdown of economies allowing no or reduced production, trading and consumption – South Africa’s economy shrunk by 7% in 2020. This is the worst performance since 1920, according to statistics. Then the world was battered by the “Great Flu” pandemic and the aftermath of the First World War.

It would be an understatement that the 2021 budget was awaited keenly by everyone in South Africa. The expectation was that there would be economic improvements, and that this would raise our hopes for the future. But the entrenched fault lines in our political economy have only been aggravated by the economic, social and psychological ravages inflicted by the Covid-19 pandemic.

It should be noted that our economy was already performing poorly prior to the onset of Covid-19, with many challenges on the fiscal, monetary, labour, productivity, indebtedness front, plus low growth. Covid-19 has simply highlighted fault lines that can no longer be hidden or wished away. We have suffered low nominal growth –1.2% annually over a five-year period, 2013-2018. By comparison, we averaged growth of 4,7% in the 2005-2008 period.

The number of unemployed persons increased by 132 000 to 8,0 million in Q2: 2022. The total number of persons employed is now 15,6 million. The official unemployment rate was 33,9%, and 44,1% for the expanded definition. The economy shrunk by 0.7% in Q2, denoting weaker economic activity, less spending power and weaker confidence overall.

The NDP set a target of reducing unemployment from 25.4% in 2010 to 14% by 2020 and 6.0% by 2030. Achieving these goals would have entailed the creation of 2.2 million jobs between 2010 and 2015, at an annual average of 436 000, on the back of an average GDP growth rate of about 4.6% per annum. Between 2015 and 2020, the average rate of job creation should have risen to 505 000 per annum, creating an additional 2.5 million jobs.

Instead, the small business sector, so critical for job creation and sustaining livelihoods in most economies, dropped from 64% in 2008 to 55% in 2015 (NPC, 2020). The South African economy’s small business composition is one of the lowest in Africa and globally. And yet, the NPC 2020 review report makes the truly astonishing claim that “the NDP does not prioritise informality”. This is linked to our inability to turn townships into areas of thriving economic activity. This is the case in many countries, especially at local level where the focus is on enhancing growth and creating jobs.

On the poverty and inequality front, while poverty rates dropped significantly in the 2000s, this has tapered off since 2011, with some indicators degenerating (NPC, 2020). The percentage of the population designated as poor in terms of the South African Multidimensional Poverty Index headcount was 17.9% in 2001, dropping to 7% in 2016 (Stats SA, 2018). According to World Bank data, 19.5% of South Africans were trying to survive on the equivalent of USD1.90 per day in 2018 (PPP adjusted), representing a reduction from the equivalent figure of 36,6% in 1996. The NPC (2020) states that the “persistence of deep poverty is most likely due to slow job creation, rising food prices, and rapid increases in utility costs that have outpaced income growth”.

Fiscal Direction of Budget and Consequences

Let us now determine the “spirit” of our fiscal direction, as outlined in the 2021 budget. Most economists have characterised the budget as “austerity by stealth”, due to the cutbacks in funding on health, education and social assistance (in real terms).

The then Finance Minister, Mboweni, proposed reducing the deficit from 14% in 2020/2021 to 6.3% in 2023/2024 in order to stabilise debt at 88.9% by 2023/2024. This will primarily be achieved by cutting R265 billion spending over the three-year MTEF, with hopefully higher income proceeds for an upturn in the economy. The Financial and Fiscal Commission (FFC, 2021) says that the tabled budget implies a real reduction in per capita non-interest spending of around 14% over the next three years.

The FFC, in its March 2021 supplementary note, states that the consolidated expenditure on emergency medical services will be R7.2 billion in 2021 (R8.2 billion in the 2019 fiscal year). The estimate for 2023 is R8.1 billion – i.e., below its nominal level in 2019. Expenditure on central hospitals will grow at 1.3% per annum between 2019 and 2023 – below the average inflation rate of around 4%. The cutting of funds contradicts the idea of using the health crisis to strengthen the health infrastructure as we transition to the National Health Insurance (NHI).

Consolidated expenditure on basic education will increase by less than 2% per annum between 2019 and 2023, below the average rate of consumer price inflation over theperiod. This will result in fewer teachers, meaning larger class numbers, especially in township schools. Funding for students at tertiary level has also been cut, resulting in the absence of many deserving students from disadvantaged backgrounds.

The sober tones of the FFC should give us pause for reflection. The FFC notes that the “budget 2021 is the first time since the adoption of the Constitution in which a budget tabled by the executive hasunambiguously proposed a substantial reduction in the real value of allocations to public services that undergird these socio-economic rights” (FFC, 2021).

Infrastructure Spent to Spur Economic Growth

According to the Presidential Economic Advisory Council (PEAC, 2020), government has been issuing bonds worth about R80 billion a month for current spending needs. Since the additional funding is already committed, there is very little room for bulk investments. Investment flows have lagged the targets set by President Ramaphosa, despite the diligent efforts to attract such.

However, government notes that the market has the capacity and the appetite to invest in long-term infrastructure projects via public-private partnerships, provided they are bankable. The private sector is prepared to do this without government having to commit initial kick-start funding. But it would want a “clear regulatory framework, transparency, zero political interference and a clear project pipeline” (PEAC, 2020). These infrastructure projects – in water, electricity and the build environment – would then create spin-offs for ancillary industries. The PEAC also envisages green projects to be prioritised.

Yet, FirstRand Chair, Roger Jardine, in the group’s 2021 annual report, has been extremely critical about the “painfully slow” pace of government’s proposed infrastructure programme. Jardine says that over two years ago President Cyril Ramaphosa pledged an infrastructure programme that was “the flywheel for economic growth and large-scale job creation”. He says Ramaphosa “has regularly acknowledged the crucial importance of South Africa’s “infrastructure programme as a key driver of his economic recovery strategy. Yet, it is hard to identify one government-led infrastructure project of any significance that has actually been executed. Progress, in other words, has been to date, glacial. The pace does not correlate to the stated ‘extraordinary’ nature of the measures required. Extraordinary suggests urgency, immediate action and focus.”

Despite the general negative sentiment, Jardine denotes “some promising developments, particularly in the energy space”. Jardine notes a disconnect between President Ramaphosa’s plea and the lack of delivery. Jardine says that the primary reason “is the historical unwillingness to crowd in the private sector”. This refers to the lack of close, cooperative ties between government and the private sector since the post-1994 period. This historic mistrust has not sufficiently receded as hoped in that initial euphoric period.

PEAC on South Africa’s Fiscal Trajectory

The Presidential Economic Advisory Council (PEAC, 2020) states that GDP has declined over the last few years, mainly due to “declining Total Factor Production” and that “fiscal policy had been unsustainable” prior to the onset of Covid-19. They express misgivings about our procyclical fiscal stance, as debt levels have been on the rise. In the same breath, the PEAC notes that austerity is essentially anti-growth.

The PEAC aligns itself with Professor Burger’s view, which proposes a “more gradual and realistic fiscal adjustment path”, as Treasury’s ambitious plan is neither economically nor politically feasible in a low growth, high interest rate environment. For Burger (2020), higher growth rates are imperative, coupled by a more gradual rise in the primary surplus by 2016/2017. To achieve this more gradual, realistic, less procyclical scenario, it needs to be “accompanied by visible structural change in order to be time consistent and credible, including wage bill reduction and fundamental restructuring of SOEs” (PEAC, 2020).

This more feasible trajectory must not only contain unnecessary perks and expenditure, engender savings by eliminating wasteful and inefficient expenditure, but it must also grow incomes via growth enhancing reforms that will result in more jobs being created. The PEAC notes that whilst the “imperative for fiscal consolidation is therefore compelling, it must also be balanced by the need to support post-Covid recovery and for a buoyant tax base”.

SA’s Debt, is it Too Onerous?

There is a general prevailing narrative that South Africa’s debt ratio to GDP is too high. It currently stands at 70.1% (IMF, 2022), which, by international standards and the average of South Africa’s debt level, is not onerous. The other plus in the case of South Africa, is that most of our debt is rand-denominated (local currency); about 90%, “shielding government from some volatility in debt costs due to fluctuations in the exchange rate” (Treasury, 2020).

The world average is 97% – advanced economies, 120%; emerging markets, 66%; upper income, higher than 66%; Asia, 73%; and Latin America, 72% (IMF, 2022). Japan is a staggering 256% and has suffered from deflation for more than a decade. The interest rate on our debt is high, at 8-9%. By comparison, developing countries’ average debt cost on external borrowing is three times higher than that of developed countries. In the low interest environment of the last decade, developed countries borrowed at an interest cost of an average of 1% (Spiegel & Schwank, 2022).

The problem is that there is no belief from financial entities that government will stick to its promises to lower the debt through fiscal consolidation, higher taxes or efficiencies in spending. Treasury has committed itself to a budget surplus by the 2023/2024 budget – which is odd, given the current depressed global economic environment. This move is intended to send a signal to the “market” and financial institutions that Treasury is committed to a “fiscal consolidation path” and to instil confidence.

On the expenditure front, we should be mindful that spending should be in areas that will spur economic growth and not go into consumer spending, especially on luxury goods. Consumption is already high as a share of GDP in South Africa. It means that households are consuming more than their income, as statistics clearly show, signifying high levels of debt.

Indeed, debt levels are very high in South Africa – too high for too many. Private consumption as a substitute for government spending to invoke higher levels of growth will not add substantially to the economy. In fact, it is likely to make the economy less productive in the future, not more productive (Baker, 2012). Dean Baker notes that “high levels of private consumption are associated with a negative savings rate”. The savings rate (not in a mechanistic manner) is important for the domestic investment rate. The Covid-19 crisis has showed that many more things are possible with commitment.


South Africa’s economy has not been robust for some time, with debt on an upward trajectory, dampening growth prospects. Our debt is not onerous by international standards, and it is overwhelmingly rand-denominated. At the same time, social ills are in abundance in our society, and some fiscal easing is necessary to tackle the cost-of-living crisis with its accompanying high prices of goods, especially food and energy. Our growth rate is low and that must urgently improve. Economic policies and choices need to be firm and consistent to ensure that there is confidence in them.

The appropriate policy mixes, contextual to our situation, should be implemented so that our economic turnaround can occur in the short term and be sustainable. This paper argues for less severe budget cuts within a more gradual, realistic, less procyclical framework and a more longer-term fiscal recalibration path – as endorsed by the President’s own economic advisory council – than the current Treasury one, which is too ambitious in its outlook. Given the current dismal global economic scenario (likely to continue into the medium term), Treasury’s fiscal consolidation plan is not regarded as economically and politically attainable in a low-growth, high interest rate, higher inflation environment.

A more realistic fiscal approach should then result in a more gradual rise in the primary surplus in the years ahead, rather than a short, sharp shock approach, which will dump the economy into a recession, with all its negative attributes. There are enough areas to cut in government spending with the amount of waste and inefficiencies prevalent. These views should be articulated in the Medium-Term Budget Policy Statement (MTBPS) on 26 October, as a much-improved main budget deficit for the 2022/2023 fiscal year is forecast, compared with the national budget projections in February. The tax take shot past the February budget outlook by R162 billion, narrowing the main budget deficit to R42.7 billion in August, from R129.5 billion in July Zwane, 2022).

Fiscal consolidation has “costs” attached to it, like a reduction in government personnel, less funds for services and infrastructure maintenance. “Rigidly sticking to fiscal orthodoxies in a crisis is not always wise, as much as it needs to be balanced with boldness” (Financial Times, 2022). We have seen how Europe has put price caps on energy prices and introduced windfall taxes for the oil companies, given the astronomical profits generated over the last period due to its high prices.

Shell’s profits more than doubled for the third quarter of 2022, to a whopping USD9.5 billion, compared to 2021 alone. Shell’s chief executive Ben van Beurden, for example, urged governments to tax energy companies via a windfall tax to ‘protect the poorest’ in society (Euronews). Stiglitz (2022) states that windfall profit taxes are necessary in “controlling key prices – such as those for electricity and food – and encouraging government interventions where necessary”.

The mining industry in South Africa has generated 85% of the windfall profits generated over the last year.

However, and crucially important, this expanded fiscal space generated by less severe budget cuts, combined with the windfall profits, should be spent on economic infrastructure development and job-enhancing projects and programmes and not on consumption. Economic infrastructure development will undoubtedly lead to higher economic growth and a bigger market, with an accompanying increase in tax revenues and more social and political stability; a win-win situation in South Africa.

Wasteful expenditure and unnecessary perks should be ruthlessly erased from budgets; SOEs should be radically restructured and better governed, underpinned by the necessary structural reforms of our economy.

It was noted by the PEAC that the market has both the appetite and capacity to invest in infrastructure programmes. More importantly, the private sector is prepared to do this without government even committing the initial kick-start funding; this is a big plus. There has been positive development in the energy sector with the opening up of the various bid windows of the renewable energy independent power producer’s procurement programme (REIPPPP) and with other components of the national energy programme.

The twin reforms of austerity related to consumption spending and debt expansion to accommodate economic infrastructure development will enable both growth and future tax revenue enlargement capable of servicing the newly acquired debt.

In the immortal words of Joan Robinson, “when it is forbidden to admit error there can be no progress”. We must disabuse ourselves of the notion that incantations will deliver the magical silver bullet; that is the height of idealism. The economy needs lubrication, as well as dealing with the debt that has grown exponentially. In an ideal world, we should be implementing Keynes famous dictum that the “boom, not the slump, is the right time for austerity at the Treasury”; it remains as true now as then. Unfortunately, the world is imperfect.

Forging an agenda of shared objectives between the government, labour, business and civil society will be critical in advancing a growth and development agenda for the country. The structural deficiencies in the South African economy have to be addressed simultaneously. Our low growth rate of the last period, likely to be less than 2% for 2022 (Treasury, 2020; IMF, 2022), should be urgently boosted. The budget and its implications require a thorough discussion of the appropriate policy options for the country’s future.

Spend on economic infrastructure development Source: Treasury projection: (grey line); illustrative alternative debt model : Inclusive Society Institute (red line)


Austerity or “fiscal consolidation” can be defined as “a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budget, debts and deficits”, which will “inspire ‘business confidence’”. Blyth considers it very dangerous, because it was the failed “classical” response to the Great Depression, 180 degrees in opposition to the Keynesian prescriptions, and also exactly what Germany has been prescribing today for Greece, with predictably disastrous results (Blyth, 2013).

Barry Ritholtz describes austerity as “the desire to slash government spending and cut deficits during a time of economic weakness or recession”.

Prof Alberto Alesina, a Harvard economist, was positive about the effects of austerity of fiscal consolidation. His perspectives were based on a study of large fiscal policy changes in advanced countries between 1970 and 2007. Alesina claimed to find evidence that spending cuts, in particular, were often “associated with economic expansions rather than recessions”. The reason advanced is that spending cuts create confidence (business), and that the positive effects of this increase in confidence trump the direct negative effects of reduced spending and exclude the possibility of any revived inflationary pressures.

Classical economics refers to the English school of economic thought that originated during the late 18th century with Scottish economist, Adam Smith, and that reached maturity in the works of David Ricardo and John Stuart Mill. The theories of the classical school, which dominated economic thinking in Great Britain until about 1870, focused on economic growth and economic freedom, stressing laissez-faire ideas and free competition. Many of the fundamental concepts and principles of classical economics were set forth in Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776) (Encyclopaedia Britannica, 2022).

Most consider Smith the progenitor of classical economic theory. However, Spanish scholastics and French physiocrats made earlier contributions. Other notable contributors to classical economics include David Ricardo, Thomas Malthus, Karl Marx, Anne Robert Jacques Turgot, John Stuart Mill, Jean-Baptiste Say, and Eugen Böhm von Bawerk (Young, 2022).

The Classical economists believed in free market efficiency, given a series of assumptions known as the First Welfare Theorem. The conditions of this theorem are that there is perfect information in the market, zero transaction costs, a large number of buyers and sellers, no externalities, and all transactions are voluntary. According to the classical school of thought, free markets functioned better than regulated markets as long as the conditions of the First Welfare Theorem held. (Econ488.blogs)

Deflation is when the overall price level decreases so that the inflation rate becomes negative. It is the opposite of the often-encountered inflation. A reduction in money supply or credit availability is the reason for deflation, in most cases. Reduced investment spending by government or individuals may also lead to this situation. Deflation leads to a problem of increased unemployment due to slack in demand. Central banks aim to keep the overall price level stable by avoiding situations of severe deflation/inflation. They may infuse a higher money supply into the economy to counterbalance the deflationary impact. In most cases, a depression occurs when the supply of goods is more than that of money (The Economic Times).

Hysteresis is from the Greek term “hysteros”, meaning "a coming short, a deficiency”. The term “hysteresis”, coined by Sir James Alfred Ewing, a Scottish physicist and engineer (1855-1935), refers to systems, organisms and fields that have memory. In other words, the consequences of an input are experienced with a certain lag time, or delay.

In economics, hysteresis arises when a single disturbance affects the course of the economy. An example of hysteresis in economics is the delayed effects of unemployment. As unemployment increases, more people adjust to a lower standard of living. As they become accustomed to the lower standard of living, people may not be as determined to achieve the previously desired higher living standard. In addition, as more people become unemployed, it becomes more socially acceptable to be or remain unemployed. After the labour market returns to normal, some unemployed people may be disinterested in returning to the work force (Kenton, 2021).

New Consensus Macroeconomics (NCM) draws heavily on the so-called new Keynesian economics in its macro-modelling and replaced it after the collapse of the Grand Neoclassical Synthesis in the 1970s. The New Keynesian paradigm, which arose in the 1980s, provided sound microfoundations along with the concurrent development of the real business cycle approach, which promoted the explicit optimisation behaviour aspect. Those developments, along with macroeconomic features that the previous paradigm lacked (such as the long-run vertical Phillips curve), resulted in the NCM. The Taylor Rule became the most common way to model monetary policy. Monetary policy as interest rate policy became one of the hallmarks of the New Consensus (prof Philip Arestis).

Stagflation is an economic cycle characterised by slow growth and a high unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate the other. Once thought by economists to be impossible, stagflation has occurred repeatedly in the developed world since the 1970s oil crisis (Investopedia, 2022).

Stimulus refers to action by the government to encourage private sector economic activity by engaging in targeted, expansionary monetary or fiscal policy based on the ideas of Keynesian economics. The term economic stimulus is based on an analogy of the biological process of stimulus and response, with the intention of using government policy as a stimulus to elicit a response from the private sector economy. Economic stimulus is commonly employed during times of recession. Policy tools often used to implement economic stimulus include lowering interest rates, increasing government spending, and quantitative easing, to name a few (Investopedia, 2021).


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This report has been published by the Inclusive Society Institute

The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.


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