Twisting in fiscal sobriety while drowning in debt by Adam Habib
Date: Mar 2, 2012 | News
Published : The New Age, 2011-03-01
Minister of Finance Pravin Gordhan’s third budget speech in the National Assembly began with a call for unity, shared pain, and partnership between societal stakeholders to address our collective challenges. It was also a speech that essentially carried two separate messages, one for the markets and rating agencies, and the other for development practitioners, civil society activists and tripartite alliance partners.Some would celebrate this as clever politics. But the problem is that all the speech did was to speak to the two poles of our economic debate without providing leadership on how to bridge the divide.
The first message was one of fiscal sobriety. Budget deficits have been markedly higher since the 2008 recession, and as a result interest payments as a share of our budget has gone up. This, we are told, is beginning to crowd resources for social expenditure and for infra-structural investment.
Gordhan, therefore devoted a significant portion of his speech to highlight the fact that the fiscal deficit for the coming year is projected at 4.6%, significantly lower than what the market expected. He also signalled that the budget deficit would be brought down to the magical 3% by the 2014/2015 fiscal year.
This, together with the message in his 2011 budget speech, which reiterated the mandate of the Reserve Bank and the importance of inflation targeting, signals government’s commitment to the conservative macro-economic management of the GEAR years.
But there was also another message in this budget. This was one of inclusive development symbolized by total spending in the budget reaching R1.1 trillion. Social spending constitutes 58% of government expenditure, and education, health and social assistance amounts to 32% of GDP. Infrastructure was perhaps the largest beneficiary in this budget with 43 major infrastructural projects being identified for funding in the future to a value of R3.2 trillion.
In this MTEF period, infrastructural investment amounts to R845 bn with R300 bn in energy and R260 bn in transport and logistics. All of this is intended to crowd in private sector investment, facilitate growth and get employment going within the formal economy.
This is essentially the economic development plan that has come to the fore in the post-Polokwane era, and has been codified in the new Industrialization strategy, the New Growth Path and the more recently released National Development Plan.
Gordhan was of course speaking to different constituencies with these different messages. The first message of fiscal sobriety was directed to the rating agencies and the private sector. After all Moody’s had downgraded South Africa’s fiscal standing from a stable to a negative only a few months earlier. The message of inclusive development was to civil society, COSATU and the SACP, the left in the ANC and to the broader public. The overall message was that we need to work together to address our collective challenges. But partnership requires collective agreements which arise as a result of tradeoffs.
In this regard the speech provided no leadership. He merely iterated the two economic messages and provided resources for it. But if we are truly going to address the challenges we confront, then hard choices are going to have to be made, especially in the coming years.
Let me summarize the challenge. At the moment we have a dialogue of the deaf between private sector economists and some treasury officials on the one hand and those interested in inclusive development on the other. The private sector economists and treasury technocrats assume that anyone who does not hold their view has to be an economic populist. They implicitly assume that their critics are simply irrational and irresponsible individuals who have no understanding of modern economic management. What they have forgotten is that there is a huge debate in serious economic circles about these matters and economists – some with Nobel Laureate credentials – hold different views in this regard. On the other hand, those interested in the development agenda often present their arguments in ways that suggest issues of sustainable debt management are not important.
They often implicitly deny the importance of maintaining manageable inflation levels. But as all of us implicitly know this debate should not be organized in such polarized terms. The options are not simply between neoliberal economics and macro-economic populism. There is multiple reasonable options in-between. Which one of these is relevant to our needs at this historical moment, and around which we can arrive at some economic consensus is the central issue we need to figure out.
Let me identify one element of the challenge in this regard. Gordhan, applauded by many private sector economists underscored the importance of fiscal sobriety in his speech so that we do not incur unsustainable levels of debt. This seems sensible. But here in lies the challenge. What does sustainability mean in the world of today? Why is a 3% – and not a 5% – deficit target important? Why is a public debt of 38% seen as reasonable but not a slightly higher figure? Bear in mind after all that all of the countries whose development we applaud, – Japan, South Korea, Malaysia, Taiwan, even Europe and the United States – all ran much higher budget deficits in their development phases. Just as importantly, note that one of our peers whose growth we constantly applaud – India – has one of the highest public debts among emerging economies at just over 71% of GDP. Japan –the third largest economy in the world – runs a public debt of 220%, and the US – the largest economy in the world – currently stands at 115%.
These figures are not listed to justify a higher public debt for South Africa. Rather the case being made is that we need to think through what a reasonable debt in today’s world is, and we should not simply assume definitions of reasonableness from a decade ago. I deliberately did not mention Greece and Europe when discussing debt levels because they have become the new bogeymen of fiscal irresponsibility. But higher public debt goes far beyond Greece, Italy, Ireland and Spain. We are in a different world, and what may be seen as reasonable now may be very different to what it was a decade ago. Reasonableness is of course a matter of perception defined in relation to others. It is silly to use definitions of reasonableness – an annual budget deficit at 3% of GDP for instance – without testing its relevance for today.
It is particularly dangerous to leave the definition of reasonableness to be determined either by ratings agencies or a few private sector economists who are not only often tied to corporate agendas with a short term economic focus, but who are also answerable to a small band of shareholders. Perhaps Treasury should do what it often does – bring together a group of Treasury officials, academic economists, union and business representatives to work out what are appropriate levels of debt in this new era that we find ourselves in. Driving a process that generates a consensual agreement in this regard would do much more for enabling the emergence of a social partnership than either pandering to or berating the corporate sector and the union movement.
Adam Habib is the deputy vice-chancellor: research, innovation and advancement, at the University of Johannesburg. He is presently on sabbatical at Oxford University.