NO PAIN, NO GAIN
Some pain is unavoidable in stabilising the fiscus, but politically palatable options do exist that might just do enough to appease the ratings agencies and financial markets
Despite SA’S fiscal crisis — and the fact that the country has very little to show for the loose fiscal policy run over the past decade — there is a lobby (mainly on the Left) that thinks the best way to resolve SA’S growth and fiscal challenges is to inject further fiscal stimulus into the economy.
This view has been well and truly punctured by a new academic study. It finds that if the government fails to take evasive action and SA’S growth rate, interest rates and the primary budget balance all remain at their recent averages, the debt ratio will hit 100% by the end of the next decade.
However, if wage-bill growth is curtailed, state spending is cut, and state-owned enterprises (SOES) are restructured in a partial one-off debt takeover event, it should be possible to stabilise the debt burden at 67% of GDP over the next three years. This might be enough to keep financial markets and ratings agencies onside.
This is the message contained in a new briefing paper by two leading academic economists, presented to the Reserve Bank and the National Treasury, on the most politically palatable way to prevent SA from sliding into a debt trap.
Prof Philippe Burger of the University of the Free State, who worked on the paper with Stellenbosch University emeritus professor Estian Calitz, is hoping to present the findings directly to President Cyril Ramaphosa at his next economics roundtable.
Burger and Calitz show that the root cause of SA’S debt explosion over the past decade has been an increase in government expenditure on all the wrong things.
Instead of investing mainly in infrastructure and productive assets that would increase SA’S long-term growth prospects,
almost two-thirds (63%) of the hike in government expenditure over the past decade went on the wage bill, according to International Monetary Fund (IMF) estimates. A further 23% went on debt-servicing costs, while 15% went on social grants (see graph).
Burger and Calitz show that if SA continues this accommodative policy stance (running a primary deficit of 1.5% of GDP), the economy will need to grow at 6.8% just to stabilise the debt ratio — which is a very unlikely scenario.
If no attempt is made to rein in the primary deficit, real GDP growth remains at its long-term average of 1.5% and real interest rates remain at about 4%, then SA’S debt ratio will hit 100% by 2031.
The IMF’S senior resident representative in SA, Montfort Mlachila, addressed the same issue at a recent Bureau for Economic Research (BER) conference in Sandton, warning that there is limited fiscal space to provide an additional boost to growth.
He pointed out that fiscal policy in SA had been accommodative since the global financial crisis: budget deficits remained at about 4% of GDP, while debt levels more than doubled. But things have reached the point where debt-servicing costs are increasingly crowding out socially desirable spending, and the public debt trajectory is becoming “uncomfortable”.
Burger and Calitz show what it would take to keep the debt ratio from worsening beyond the psychological threshold of 60% of GDP, which is roughly where it is expected to be at the end of 2019/2020, following the recent Eskom bailout.
“The message has to get home that we have run out of road down which to kick the can,” says Burger in explaining why they drew the line at 60%. “In addition, in the academic debate, some argue that once you