Mboweni’s underlying logic confuses the scope of fiscal policy
If it’s structural reform vs spending, spending that prevents hundreds of businesses from going bust, and millions going hungry, will make a much bigger difference
Finance minister Tito Mboweni’s op-ed is an important contribution to the current economic debate (Structural reforms — not spending — are the best way to achieve growth, July 14). Among other things, it succinctly captures the manner in which the minister and, presumably, the National Treasury, approaches fiscal policy.
While the minister makes a number of important points, the underlying logic confuses the application and unduly narrows the scope of fiscal policy. The minister argues that government spending has and will in the near term continue to be ineffective at stimulating economic growth, and that high levels of debt are retarding growth.
The inefficacy of government spending is due to “structural constraints” (such as poor energy supply) and the reliance on tax increases and debt issuances, which have “constrained public and private investment and thus growth”. For this reason “structural reforms”, not emergency spending, are required.
This collapses short- and long-run considerations, and demand and supply problems and solutions. In the short term there is a striking absence of any grappling with the immediate Covid-19 reality in the minister’s op-ed. The country faces what will likely be its worst economic crisis ever.
Hunger has roughly doubled, with almost half of all households reporting they ran out of money to spend on food in April. About 3-million workers lost their jobs between February and April. Women, children and poorer people have been hardest hit. The international context is similarly dire, with falling global growth and demand.
Even if we accept the minister’s assertion that, prior to the crisis, the impact on GDP of government spend was not large — a small “fiscal multiplier” — this is not particularly revealing about the current environment. As argued previously, spending that prevents hundreds of businesses from going bust, thousands losing their jobs and millions going hungry every day, will make a much bigger difference than in normal times.
This well-established fact underpins rescue measures globally. Luckily, we have relatively simple and effective policy instruments to hand — primarily wage support, business financing and social grants.
Arguing that it is tricky, and not always successful, to use government spending to grow the economy in the long term is not an argument to avoid using it to save the economy in the short term. Arguing that we need to resolve supply-side constraints is not a coherent argument against emergency management of demand. Of course, it is important to fund such rescue measures prudently.
For these reasons, I agree with former Investec economist Brian Kantor that we should borrow short term, for which borrowing costs are surprisingly low, while using monetary policy to keep interest rates down. Similarly, funds from multilateral institutions, under carefully specified conditions, may be a low-cost option. But there has been too much discussion about whether to borrow and too little about how to borrow sustainably.
The manner in which the minister approaches fiscal policy in the long run is equally narrow. Besides passing reference to investment in public infrastructure there is no articulation of a positive vision for fiscal policy. This is shaped by three factors:
The long-term benefit of education spending is not simply measured by whether education spending expands GDP in the short term
First, the minister is pushed towards this position by his earlier assertion of low fiscal multipliers. If government spending has limited impact, why spend at all? A cynic might be forgiven for thinking claims to low multipliers are a convenient way of justifying austerity.
Second, the minister argues, correctly, that the economy faces structural constraints to growth. He references the Treasury’s “Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for SA” document, which proposes a series of micro-economic reforms to remove these constraints, leaving aside macro-economic policy. In his op-ed, Mboweni gives the release of telecommunications spectrum as an example.
Third, rather than a positive role for fiscal policy, what appears to be prioritised is getting the state (debt) out of the way. This is based on arguing that increased borrowing constrains private and public spending. This might occur, for instance, from debt-service costs crowding out other public spending, or because businesses fear tax increases in the future. This approach artificially separates the micro-economic from the macro-economic, and relegates the latter to the role of providing a “stable” environment. This is precisely what has failed for the past 25 years.
To achieve “structural transformation” — the diversification of the economy towards higher value-added, more productive, better paying and environmentally sustainable economic activity — both micro-economic reforms and a complementary macro-economic framework are necessary.
Investment in health or education, for example, is crucial for human capital development, which is essential to long-run growth (the budget cuts the school infrastructure grant in the near term). Similarly, investment in rail infrastructure specifically designed to serve new manufacturing sectors would be important. Active exchange rate policies could switch spending from imports to domestic goods, and a basic income grant could significantly increase the spending of the poorest.
Such a macro-economic framework would support micro-economic reforms and see fiscal policy as having a role in raising both aggregate demand and aggregate supply simultaneously. Such complementarity is essential because the economy cannot sustain large, additional demand without expanding supply capacity (inflation and/or unsustainable imports might occur). But supply capacity cannot be expanded in the medium term if we disinvest from crucial social and economic infrastructure, as the minister has indicated he plans to do, no matter the number of “micro-economic reforms” we enact.
Importantly, the benefit of many of these investments take time to manifest and will not appear in the multiplier. The long-term benefit of education spending is not simply measured by whether education spending expands GDP in the short term. Similarly, essential-care activities remain uncounted by GDP.
Fiscal policy’s success is not just a matter of growth rates. In SA, employment is obviously a critical variable. Macro-economic policy also has distributional consequences, and in the world’s most unequal economy, we should never talk about macro-economic policy in isolation from this.
In addition to casting fiscal policy as largely ineffective, the minister seems to imply that those tasked with its management have very little control over its outcome. The multiplier, for instance, as the parliamentary budget office has argued, should not just be a subject of study but a policy variable. The question should be: How do we design fiscal expenditure in a manner that maximises the multiplier and other desired outcomes?
It is unfortunate that, as head of the department tasked with managing fiscal policy, the minister has provided such a confusing picture of fiscal policy’s role in the short and long term, and approaches it so narrowly. If we are to rescue our economy in the short term, and transform it in the long term, the minister’s approach offers little guidance.
• Dr Isaacs is the co-director of the Institute for Economic Justice and a lecturer at the School of Economics and Finance at Wits University.
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