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Reducing the deficit by planting fiscal time-bombs

Redge Nkosi is the executive director of Firstsource Money and the founding executive board member of the London-based Monetary Reform International.

Redge Nkosi is the executive director of Firstsource Money and the founding executive board member of the London-based Monetary Reform International.

Published Feb 26, 2022


By Redge Nkosi

In his sweeping account of the European Union’s budgetary issues and state power, Her Majesty’s Treasury (UK Treasury) senior official and Cambridge economist Wynne Godley remarked, “the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony.”

Here, Professor Godley’s remarks were an intellectual treatise of the government’s control over money as instrument of state power. More importantly, it is the government’s control over money as a tool for policy.

And indeed, it is this power that the former governor of the Federal Reserve Bank of New York, Dr Beardsley Ruml, alluded to when he said that the state could not be dependent on capital markets for its financial wherewithal, so long as its sovereign currency was not convertible into some commodity such as gold.

What these and other eminent thinkers suggest is that an independent nation cannot encumber itself when it comes to fulfilling its policy objectives, such as unemployment, poverty, growth etc; sources of funding are there.

What is more, even the International Monetary Fund’s own financial programming model, one of the most widely used macroeconomic models in the world, which shows the key macroeconomic relationships such as those South Africa is battling with, does show the power the state possess when it comes to funding options.

So, South Africa’s supposedly financial/budgetary challenges are a question or a choice of its political economy and not one of macroeconomic science.

Finance Minister Enoch Godongwana’s inaugural Budget, lauded by market watchers, shows a perilous state with no sign of decent growth prospects for the foreseeable future. The Budget relies on austerity to reduce debt and a combination of structural reforms and public private partnerships to generate growth.

These are the capstone issues in the Economic Reconstruction and Recovery Plan (ERRP), a government policy document. Yet none of these have any history of success.

South Africa’s debt burden, however one considers it as high or low, is a product of the country’s macroeconomic framework. And so is the so-called growth problem. If one were to go back to the IMF’s financial programming model mentioned above, with a minor amendment, both the so-called debt and growth problems we face would not be as bad as they are.

The IMF itself has successfully deployed its model where it deemed appropriate. But it has not, for political reasons, made clear to many countries the key redeeming features of its model. It bears repeating, South Africa’s so-called growth and debt problem are a function of its defunct macroeconomic policy regime.

With regard to structural reforms, Treasury’s own modelled work show that structural reforms will not yield South Africa any meaningful place in the sun. So, statements made in the Budget about the efficacy of structural reforms is political, not economic. Dani Rodrik, a member of President Cyril Ramaphosa’s economic advisory council showed how elusive the promise of structural reforms is. But so did the IMF’s own former chief economist, Olivier Blanchard, when he was in office.

In this Budget, as in the State of the Nation Address and various government pronouncements, there is a deliberate approach to emphasis the phrase “private sector” and its role in economic growth and job creation. Essentially, “private sector” refers to those few elite and connected firms, that must be part of the public private partnerships in key state projects.

As a signature item, infrastructure investment is central to the revival of the economy and its competitiveness. This is not in doubt. The Budget announced the creation of a centre of excellence for public private partnerships (PPPs), (as a delivery model) and related blended finance projects. It is a high item on the president’s priority issues.

It is here where the World Bank surfaces as a profoundly important player. A player to financialise development and privatise public goods. It is here where private finance, and indeed the phrase “private sector” comes to play a prominent role, especially in key targeted so-called network industries: Eskom, Transnet, Water and related public goods. And it is also here where the Budget sets its sight yet budgets so little.

It is the fulcrum of many unclear issues, including the unnecessary $750 million (R11.5 billion) World Bank budget support loan dubbed “Development Policy Operations”, embedded in the so-called “Country Partnership Agreement” (CPA) entered into on June 24, 2021. Rejecting this loan by Parliament, says Minister Godongwana, will plunge South Africa into a “fiscal crisis”.

A fiscal crisis for an independent country or a colony, would question UK’s former senior treasury official, Godley.

As Dick Forslund, a senior economist at the Alternative Information and Development Centre (AIDC) puts it: rejecting this loan would mean the rejection of the CPA and would signal the rejection of Treasury’s misguided Budget cuts, the privatisation plans, the public service sector “wage freeze”, the public sector headcount cut and others.

Essentially, this Budget and its emphasis on PPPs, instead of deactivating, it is planting more than fiscal time-bombs for South Africa. The price structure of the economy will balloon, leaving the economy uncompetitive instead of its claimed opposite.

As the minister lauds the creation of PPP centre of excellence and the use of PPPs, the UK finance minister, in his budget speech of October 29, 2018 confirmed that the UK government will abolish the use private financing of infrastructure initiatives (PPPs).

Elsewhere, the European Court of Auditors, the guardians of EU finances, found that PPPs cannot be regarded as an economically viable option for delivering infrastructure projects. The auditors said PPPs audited suffered from widespread shortcomings and limited benefits, resulting in €1.5bn (R26bn) of inefficient and ineffective spending, thus condemning their use.

This sad story does not stop in the EU. Australia also found them to be too expensive and not worth their use.

Adding to the EU Court of Auditors was the French Court of Auditors. Researchers Gabor and Sylla write that France had long denounced PPPs as far too expensive than direct public investment and for worsening poverty, access and inequality. Yet in the most unequal economy on Earth, the Sona and the Budget promote these disastrous instruments.

In yet another condemnation, the French parliament, the senate, whose July 2014 report called them risky “des bombes à retardement” (budgetary time-bombs).

It is, therefore, ironic that Godongwana should label the possible rejection by Parliament of the highly unnecessary World Bank loan as plunging the economy into fiscal crisis, when he is busy and happily planting fiscal time-bombs today and for generations to come.

On the small, medium and micro enterprises (SMMEs) front the announcement about the “Bounce Back Scheme” should be welcomed. This will go some way towards injecting the dried credit for SMMEs. We cannot rely on the R350 grant to replace changes necessary in our credit system.

Instead of introducing urgent reforms in our banking system, Treasury and the Presidency avoid touching this network industry due to vested interests.

It is only reasonable that given the issues raised above and many more, a call on Madam Speaker to reject the 2022 Budget is in order.

Redge Nkosi is the executive director of Firstsource Money and the founding executive board member of the London-based Monetary Reform International.


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