Economy needs stimulation and not only cuts, economist tells MPs
The budget should have done more to stimulate consumption and boost GDP even if this was at a medium- to long-term expense of a rise in the debt-to-GDP ratio, an economist argued in parliament on Tuesday.
Parliamentary budget office deputy director for economics Seeraj Mohamed presented this argument in a submission to parliament’s appropriations and finance committees on the 2020/2021 budget, which was tabled in parliament by finance minister Tito Mboweni last week.
The office undertakes research and analysis for the committees and provides advice about policy proposals that have budgetary implications.
Mohamed said the tax relief the government has proposed through increasing the brackets by more than the inflation rate would probably benefit the middle to more affluent classes, which are heavily indebted, but is less likely to increase consumption by them.
What is needed is to stimulate consumption by poorer households through direct transfers.
Financial and fiscal commission research director John Kruger noted in his presentation that the vulnerable section of the population has grown from 13.6% in 2008 to 19.4% in 2017, while the chronically poor segment has declined from 52% of the population to 42% over this period.
Most economists have been concerned about the level of debt and the increasing share of government expenditure taken up by debt service costs, but Mohamed said debt consolidation is not a priority. By increasing GDP over time, the debt-to-GDP ratio would decline, he said.
The Treasury predicts debt-to-GDP to rise to 71.6% by 2022/2023.
The Treasury highlighted the weak economic outlook in the Budget Review, which contained estimated real GDP growth of 0.9% in 2020, 1.3% in 2021 and 1.6% in 2022. Low growth in 2019/2020 led to a R63.3bn downward revision to estimates of tax revenue for 2019/2020 compared with the estimates in the 2019 budget.
But Mohamed argued that the macroeconomic approach of the 2020/2021 budget is too narrowly focused on the supply side of the economy.
“The speed at which an economy can grow depends largely on improving aggregate demand. Reducing the cost of doing business will be effective only if businesses have adequate demand for their products. Demand in export and domestic markets is seriously constrained,” Mohamed said.
Governments worldwide are considering the use of fiscal policy to boost demand, he said. In SA, aggregate demand has been a drag on the economy.
He highlighted the limitations on monetary policy being used to stimulate growth and said fiscal policy should be used for this.
The fiscal consolidation the Treasury has implemented over a number of years has been a drag on growth and contributed to a higher debt-to-GDP level.
Expenditure cuts of R261bn were proposed in the 2020/2021 budget, but this does not include measures to stimulate growth, investment and employment in the medium term. It also does not include plans for responding to global risks.
Efficient Group economist Dawie Roodt said this view is incorrect, as the government’s fiscal stance has been expansionary for about the last 10 years, and this approach could not continue indefinitely.
“The fiscus is highly expansionary — that is part of the problem. The stimulation from the fiscal accounts is actually accelerating. You simply have to look at the debt levels,” Roodt said, emphasising that there is no space to increase debt levels further.