In a previous Daily Maverick article, I argued that South Africa needs a three-pronged package of systemic change if we are to emerge from the current crisis. This package is summed up in three terms: stabilise, stimulate, and structurally transform.
- Stabilise: includes measures to support and stabilise most depressed and marginalised communities and crisis-hit industries
- Stimulate: requires a macroeconomic stimulus package — monetary, fiscal, and investment measures — to get the wheels of the economy turning.
- Structurally transform: requires measures to diversify and industrialise our economy.
Integral to this is the need to expand public spending and inject new funds into the economy. Through this, economic stagnation, rising debt levels and declining revenue can be arrested by increasing demand and expanding production.
The logic of austerity — cuts to government expenditure and/or regressive tax increases during periods of the economic downturn in order to reduce debt levels — runs in the opposite direction.
Austerity is defended on one or both of the premises that high debt levels have a negative impact on growth by “crowding out” private sector investment, and that public spending cuts drive down interest rates and this stimulates higher private sector investment. It also assumes that cuts to government spending have a relatively little adverse effect on aggregate demand.
All of these assumptions are false. There is no credible evidence that a particular level of debt is growth-retarding, interest rates do not appear to be sensitive to demand for funds in this way, and public sector cuts do considerable damage.
This is now becoming the economic consensus, including among international organisations such as the IMF…..more