The Sarb is armed with one instrument, the interest rate and a single overriding goal, the inflation target. Photo: Supplied
The Sarb is armed with one instrument, the interest rate and a single overriding goal, the inflation target. Photo: Supplied

MTBPS is ample proof that macroeconomic framework is failing

By Chris Malikane Time of article published Oct 31, 2019

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JOHANNESBURG – If there is any evidence that the overarching macroeconomic framework of South Africa is failing, the 2019 Medium-term Budget Policy Statement (MTBPS) is one. 

The MTBPS is supposed to outline the macroeconomic framework over the next three years. It is silent, which means the same framework remains intact. It seems those responsible for macroeconomic policy threw their hands in the air not knowing what else to do, and thereby allowed the economy to be on autopilot, as the unemployment rate keeps on ticking upwards. 

The framework continues to fail.

This MTBPS did not provide a concise analysis of the sources of the economy’s malaise. It should have noted, as a point of departure, the context of a rising trend in the unemployment rate. It is also taking place in the context of a prolonged growth stagnation, declining profitability in the private sector, especially the industrial sectors, with attendant possibilities of industrial capacity scrapping. 

Simultaneously, there are downward pressures to the inflation rate, which is now below the inflation target. The MTBPS says nothing about this context.

The MTBPS cannot lead us out of this crisis. It proposes petty interventions that are aimed at pruning government spending on public sector wages and salaries, the unintended consequence of which might be to increase incidents of corruption. 

Unsurprisingly, the MTBPS is maintaining a conservative, fiscal consolidation line, which is targeted at freezing public spending at the end of the next three years. All this is simplistically aimed at curbing public debt, which is projected to rise above 70 percent by 2022. 

While indeed hope is not a strategy, the MTBPS has a misplaced hope that an austerity-induced fall in public debt will stimulate economic growth. The unpleasant dynamic is that a cut in public spending will reduce private sector incomes more, decrease the tax base, widen the budget deficit and further increase the public sector borrowing requirement. 

What further drives public debt upwards is the increasing interest burden, which also indicates policy weaknesses in the financial strategy of the fiscal framework. There is no stimulus in this MTBPS, but there is a far-fetched hope that the package of structural reforms that are contained in the Treasury document might do the trick. Can this economy really get out of a slump without a serious demand stimulus? Can the macroeconomists please stand up? 

There are no “beneficial supply shocks” to explain the subdued inflation climate. Fuel prices have been on the rise and the currency is facing depreciation pressures. These inflationary pressures have nevertheless been contained. How? There is a huge deficiency in aggregate demand, which shows itself in the form of a persistently rising unemployment rate. 

This MTBPS does not outline a set of policy measures to boost aggregate demand, even as the inflation rate is heading towards the lower part of the target band. All the MTBPS could say is that “low inflation is good for workers”, even if this comes at the cost of a rising structural unemployment rate? 

The expenditure path that the MTBPS proposes contributes to the low growth and the haemorrhaging of the manufacturing sector. It has also contributed immensely to the previous recession. 

What is required is a thinking outside the existing macro-framework. The MTBPS needed to provide policy interventions that would point at an expansionary activist fiscal policy, coupled with measures that open the fiscal space anchored on an unconventional, progressive financial strategy to contain the increase in public debt. 

The MTBPS also needed to provide a new framework to seriously transform the structure of the economy, not only in terms of broad and bold support for industrialisation and accelerated delivery of basic goods and services, but also in terms of fundamentally altering South Africa’s growth dynamics so that increasing economic growth is predicated on inequality reduction. 

The section dealing with the SA Reserve Bank (Sarb) says nothing illuminating from the policy perspective. How does the fact that the Sarb pays more than 90 percent of its profits to the Treasury assist in getting the economy out of the crisis? There is no policy statement about what the Sarb can do, what new instruments it can activate, to get the economy out of the rut. 

The Sarb is armed with one instrument, the interest rate and a single overriding goal, the inflation target. The unemployment is trending upwards, the inflation rate is trending downwards, and the currency is jittery, and the Sarb is timid. 

The MTBPS cites lessons from India, Brazil and Mexico about what is happening with state-owned enterprises, it does not cite what instruments central banks in these countries are using to manage the effects of the global stagnation on their economies. 

It does not mention how these economies have managed to contain the unemployment rate from rising and to prevent productive industrial capacity from being scrapped in the face of deficient demand.

Chris Malikane is an associate professor of economics at the University of the Witwatersrand.


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