NEW GROWTH PATH: Macro-economic policies
The first point that needs to
be made is that nothing has come of the “greater restraint” in fiscal policy
THE NEW GROWTH PATH set out a very specific and somewhat controversial macroeconomic policy framework. Two questions arise: Is this framework being implemented and was it feasible in the first place? According to the NGP, South Africa’s macroeconomic stance would be guided by “looser monetary policy and a more restrictive fiscal policy, backed by microeconomic measures to contain inflationary pressures and enhance competitiveness”.
The NGP called for lower real interest rates to support a more competitive exchange rate and reduced investment costs. It also called for larger buying of foreign currency flowing into SA to counter the rand’s appreciation. Reserves would be used to build a development fund to invest in infrastructure in Africa.
“A further set of tools to address the competitiveness of the exchange rate is being explored, including measures to address the negative effects of short-term capital inflows,” the NGP stated. It added there would be “greater restraint” in fiscal policy to slow inflation, despite easier monetary policy. A counter-cyclical fiscal stance through the business cycle would manage demand in support of a more competitive currency while achieving critical public spending goals.
The new fiscal policy would require vigorous prioritisation and improved value for money, including moderation of remuneration growth.
The first point to be made is that nothing has come of the “greater restraint” in fiscal policy. In fact, fiscal policy is looser than it was envisaged in the Medium Term Budget Policy Statement in October last year. Then the fiscal deficit was projected to fall to 4,6% of gross domestic product over the 2011/2012 fiscal year from 5,3% over the past fiscal year. However, latest projections in the Budget put the deficit at 5,3% of GDP again in the current fiscal year. For 2012/2013 it would be 4,8% (instead of 3,9%) and in 2013/2014 it would be 3,8% (instead of 3,2%).
If fiscal policy is to be used as an instrument to fight inflation, a deficit of 5,3% of GDP is too high. Those deficits are in any case not what the Harvard Panel on economic growth in SA had in mind when it proposed tighter fiscal policy and looser monetary policy. The panel had fiscal surpluses in mind.
The easiness of fiscal policy is clear from the current balance, which shows the difference between current revenue and current expenditure. It shows Government is currently borrowing to finance short-term consumption. SA’s savings are being used to finance higher current expenditure on wages, interest and goods and services.
The second point is that monetary policy could hardly be looser. With a repo rate of 5,5% and an expected inflation rate of 5,5%, it means the real rate is zero. Yet one senses from the NGP document its writers envisaged something even looser.
The third point is that both the Reserve Bank and Government have, as envisaged by the NGP, stepped up buying foreign exchange to try to curb the rand’s strength. But the policy doesn’t seem to be working, although some would say the rand would have been even stronger without the buying. But no sign yet of reserves being used to invest in Africa.
No word either about the “further set of tools to address the competitiveness of the exchange rate” – that is, controls on capital inflows. Such tools have been used in Brazil and some Asian markets. With foreign capital inflows drying up in last quarter 2010 and first quarter of this year it’s clear those tools aren’t necessary and would have disastrous consequences if the current account deficit were to widen.
The NGP suggested various microeconomic measures to curb inflation, including a more vigorous competition policy. However, the NGP’s chief architect – Economic Development Minister Ebrahim Patel – is trying to stop Walmart from importing cheap goods on a large scale if it takes over Massmart. That flies in the face of the fight against inflation.