The proposed austerity programme could cut 0.16 of a percentage point from average annual growth and raise average unemployment 2.2 percentage points over the next decade

In late October, the Treasury released a second edition of its policy response to the country’s economic crisis. Like its original August version, it proposes a set of microeconomic, mainly supply side, measures aimed at removing perceived “inefficiencies” and “imperfections” in the operation of the free market. The document argues that the proposed microeconomic measures will stimulate macroeconomic growth in SA.

Our simulation of the Treasury proposals shows that the measures will add a mere 0.27% to the average GDP growth rate and lower the unemployment rate by just one tenth of 1% over the next 11 years.

Despite the inadequacy of these microeconomic proposals to get the economy off the ground, in the latest medium-term budget policy statement, the Treasury added more salt to the wounds of the SA economy by planning to administer fiscal austerity measures to an economy with a 29.1% unemployment rate and 0.5% growth rate.

Having a full picture of the Treasury’s combined microeconomic reform proposals and its fiscal austerity proposal, the question is what the net effect of the treasury’s overall proposals will be on growth and employment. The table provides an estimate of the MTEF total expenditure reduction by comparing the MTBPS planned expenditure by economic classification over the next three years with estimates of corresponding expenditure based on 2019-2018 growth rates. Overall, the Treasury proposes government expenditure reduction of R487bn over the next three years.

Using our multisector macroeconomic model of SA, we have assessed the implication of the proposed austerity measures. As per Treasury proposals, we consider the following “what if” questions:

1. What if the number of public employees is reduced in 2020 to save the government R53bn in the compensation of public servants?
2. What if, following the cut in public employment in 2020, the number of public employees is adjusted further in 2021 and 2022 to ensure the government wage bill for those years is reduced by R68bn and R89bn, respectively?
3. What if government spending on goods and services is reduced by R81bn over the next three years?
4. What if government transfers and subsidies, especially to households, are reduced by R155bn over the next three years?
5. What if general government investment in economic and social infrastructure is reduced by R41bn over the next three years?

The proposed expenditure reductions, which are equivalent to 3% of GDP during the first year, translate to negative direct and indirect demand shocks to the economy. It is generally understood by economists that such a reduction in government expenditure will slow the economy by negatively affecting economic growth and employment. This is borne out in our simulation results.

Our model results show that the proposed fiscal austerity programme will shave 0.16 of a percentage point from the average annual growth rate and raise the average unemployment rate by 2.2 percentage points, over the course of the next decade.

It is important to recognise that the effect of the medium-term fiscal austerity measures will be felt beyond the next three years. Our estimation shows that by 2022 the measures are expected to reduce total employment by 550,000, mainly due to the cuts in public employment. However, the negative effect of reduced household income and expenditure on output and employment will persist well beyond 2022.

Overall, by 2030, total employment is projected to be lower by 730,000 due to the medium and long-term dynamic effects of fiscal austerity measures of 2020-2022.

In terms of the combined effects of the proposed microeconomic policy reforms and the fiscal austerity measures, the contractionary effects of the fiscal austerity measures are projected to reduce the small positive effect of the microeconomic measures on average annual economic growth by 0.5-0.2 percentage points and raise the average unemployment rate by two percentage points, over the course of the next decade.

These likely consequences of the Treasury’s overall microeconomic and fiscal austerity proposals underscore the urgent need for an inclusive growth and employment strategy with a credible set of consistent policies that are likely to deliver badly needed high growth and employment.

Indlulamithi SA Scenarios 2030 and a recent research report produced for the department of trade and industry put forward examples of such strategies and policy proposals.