Budget Speech 2021: Cooperation, timeliness and the fiscal multiplier in times of recession are a necessary short-term measure Stellenbosch Business School Skip to main content
Budget Speech 2021
Improvement in SA’s economic performance should not be measured only by international agencies’ credit ratings

Averting a prolonged crisis in a South African economy already fragile before the outbreak of Covid-19 will require fiscal relief more directly targeted at individuals, small businesses and local governments, along with greater macro-economic policy coordination, in order to steer an inclusive post-pandemic economic growth path.

Finance Minister Tito Mboweni’s national budget would do well to take a cue from the “unprecedented measures” taken by governments and central banks to aid economic recovery after the 2009 global financial crisis, says development economist Dr Nthabiseng Moleko, senior lecturer in managerial economics at the University of Stellenbosch Business School (USB).

“Cooperation between central banks, national treasuries and legislators was key to resuscitation in Europe, USA and Asian economies post-2009. Governments offered guarantees for banks, there were national bailouts and interest rate cuts, central banks financed governments at low nominal yields, because in the quest for recovery nations were looking for cheaper finance and needed to actively counter the economic slowdown. Institutional arrangements and improved macro-economic coordination widened the economic impact of increased government spending.

“The inclusive growth needed now in South Africa is a national imperative, but for recovery to happen in a time of crisis when private sector funds are contracting and disinvestment is a reality, the fiscal space is the real source of stimulus,” she said.

Dr Moleko argued that improvement in South Africa’s economic performance should not be measured only by international agencies’ credit ratings, but also by the ability of national initiatives to build a post-Covid economy measured by reduction in unemployment, poverty and inequality, the growth of small businesses and improved socio-economic development outcomes.

The economic shocks from Covid-19 emanate directly from government-imposed lockdown measures, both domestically and globally, she said, and averting these requires assessment of the stabilizing measures in the fiscal stimulus package announced in the supplementary budget of June and medium-term budget policy statement (MTBPS) of October last year.

Dr Moleko pointed to South Africa’s unprecedented fall in economic output, with the contraction by 7.2% in 2020 the greatest dip since the Great Depression of the 1930s, and the budget deficit widening from 6.8% to 15.7%, more than doubling from R370 to R761 billion.

The contraction in economic output worsened the debt-to-GDP ratio from 65.6% to 81.8% in 2020, and this is forecast to increase to 86% this year.

Austerity measures were reported in the October MTBPS of R250 billion over the next two years widening to a longer five-year period to reach the targeted primary surplus, she said.

“Unless we see economic expansion and revenue-enhancing growth measures, the over R4 trillion gross national debt as a proportion of GDP will remain at over 80%.

“It is important to assess whether the economic recovery plan has been enough to stem the tide of continued economic collapse. Timing and the design of the fiscal expenditure is even more crucial as this will determine whether enough was done to avert the freefall.”

Dr Moleko said South Africa’s R500 billion fiscal stimulus of approximately 10% of GDP has “only really been an exercise of fiscal reprioritization and moving within the current budget”, while downward revisions in the Budget Review continue as Treasury targets a budget surplus.

“Meanwhile, other equally important numbers – the worsening unemployment levels, widening inequality and increasing poverty – remain largely ignored in measuring the success of the country’s economic policies.  South Africa didn’t need a crisis to reach 42% unemployment, it was already in that state of its own accord.

Dr Moleko argued that the post-lockdown economy should not use the pre-crisis baseline as a source for recovery.

“Given the already sluggish growth, a slower U-shaped recovery was to be expected versus a more rapid V-shaped recovery, but the outcomes of South Africa’s economic interventions and various economic indices display that there has been no recovery. Instead, we are still hemorrhaging.

“Job losses reported in Q3 and Q4 of 2020 show no recovery, Q3 and Q4 output remained poor, and both public and private sector investment as a percentage of GDP continue downwards. Parallel to short-term economic stabilizers, long-term structural reforms that improve the contribution of manufacturing value added (MVA) as a proportion of GDP, and transform the value chains and investment pathways to productive investments, remain important to avert South Africa returning to the pre-crisis crisis,” she said.

While South Africa’s long term macro-economic policy response to the low growth trap and worsening per capita income has remained largely unchanged since the late 1990s and the advent of GEAR economic policies, Dr Moleko said it would be useful to examine how the fiscal multiplier had been used in other economies as a short-term intervention.

“The fiscal multiplier has shown high impact for low-income households who need to borrow more to meet basic needs when income is low, with a high multiplier of up to 0.67 while the rest services debt or is saved. There is also a smaller marginal propensity to consume with tax rebates, showing higher impact on resuscitating household aggregate demand for unemployed individuals.”

By way of example, she said, in 2020 the USA supported household, government and enterprise consumption as means to resuscitate revenue and stabilise the economy, distributing 12% of GDP. The response was targeted at direct transfers to individuals (23%), increased government expenditure (24%), transfers to local governments (12%), support for local business (29%) and tax provisions (11%).

“The world’s economies have accepted the short-term impact of fiscal responses leading to rising deficits as a trade-off in the attempt to bolster future revenues, with the size of fiscal stimulus packages rising between 2 to 5% of GDP in America and Europe,” she said.

After the financial crisis of 2009, China’s fiscal stimulus package was 12.5% of GDP, the largest globally. The allocation was largely to boost public investment, with 38% into power and transport infrastructure, 25% into construction, 10% into housing, 9% into rural village infrastructure. Rural projects formed a key part of economic revival, however priority in the fiscal stimulus was given to profits and corporates versus workers and welfare outcomes.

The effect of the local multiplier through transfers to local governments shows a strong short-term and even higher long-term impact on economic stimulus, Dr Moleko said.

“Evidence has shown high fiscal multipliers from unemployment income transfers, and household and business transfers, and that local economies exhibit the larger multipliers during economic recessions. By contrast, South Africa’s approach has had low impact – looking at the allocation of the R500 billion stimulus package, a mere R18 billion of the R200 billion credit guarantee scheme and only an estimated R15 billion of the tax rebates of R70 billion have been used, less than 4% each of the total stimulus effort.

“The allocation towards social security of R50 billion (10%), and wage relief of R55 billion (11%), are perhaps the biggest relief areas.

However, these are grant finance and do not deal with the fundamental macro-economic challenges faced in the economy.”

Dr Moleko said the high fiscal stimulus exhibited by local municipal transfers has not received sufficient focus, particularly in rural areas.

“South Africa has seen a contraction in transfers to local governments with R20 billion in support reported, mainly from reprioritized municipal expenditure. Poor municipalities require urgent support not only to prevent imminent economic collapse, but to forge measures that will not only improve service delivery but open new revenue generating paths.

The first response to the Presidential Economic Recovery Plan and the fiscal policy was negative, with a credit rating downgrade from international agencies and the continued negative outlook by credit rating agencies is unlikely to change with the waning of fiscal and economic strength.

“However, the improvement of economic performance has to move beyond improving the view of international agencies’ rating of a nation’s probability to default on its sovereign debt, and rather to rebuilding a post-Covid-19 economy that emphasises inclusive growth, improves development outcomes and transforms the growth trajectory from the capital intensive, oligopoly-led industries towards SMMEs.

“The economic recovery of the nation is embedded in the political economy of South Africa, with various interest groups in this melting pot. In serving the much-anticipated budget of 2021, one of the questions we need to answer is, whatever the form of economic recovery, whose tastebuds are we tantalising? In any menu, several dishes can be selected. Whom do we continue to serve?”


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