PETER ATTARD MONTALTO: Orthodoxy does not mean policy is cast in stone

Posted in: Economics, South Africa on October 18, 2021


Maybe there is some SA exceptionalism that creeps into the demands to destroy orthodoxy.

This column was first published in Business Day. 

The “O” word has been supposedly weaponised in a patronising manner, as if you choose your views within the SA discourse based on blind loyalty more than a cold-headed researching of the facts and literature, weighting both sides before coming to conclusions.

The issue of “orthodoxy” is top of mind at the moment as we approach the medium-term budget policy statement (MTBPS) on November 4. What exactly is the Treasury meant to do to break free of orthodoxy in the MTBPS? Step up spending by, say, 50%? Funded by what?

There is a bizarre view out there that somehow orthodoxy blinds the National Treasury and SA Reserve Bank to the fact that higher taxes and debt funding or some kind of modern monetary theory (MMT) are sitting on the table as easy, yet-untapped options. Are the staff of both institutions really held in such low regard where their motivations are doubted? This is the stuff of conspiracy theories.

Of course what has happened is that (very transparently) both institutions have done a huge body of research into monetary and fiscal policy options and their effects, decomposing the impact of various policy and macroeconomic shocks. Conclusions are drawn and debated widely among academics, in markets, with investors and other stakeholders, and challenged.

This isn’t to say that within “orthodoxy” there aren’t a range of possible outcomes, nor that the right one is always chosen. (I, for instance, have called out the Treasury’s cash levels in the past and its decision for a real cut in grants in February.) But this is not the same as saying their entire frame of reference is incorrect.

Orthodoxy also doesn’t mean that empowerment, communities and transformation are overlooked. Do people seriously think that a succession of finance ministers or directors-general of the Treasury, or leadership of the Bank didn’t care about these things? It is just a belief that there are underlying laws of gravity that will render transformation efforts unsustainable or impossible to deliver if ignored. This is the problem with appealing to constitutional rights for spending in isolation when there exists a budget constraint.

A paper under the National Treasury partnership SA-TIED programme of research last week from Hylton Hollander on debt-financed fiscal stimulus is a case in point. It very clearly laid out every assumption being made, every equation and process to draw conclusions in excruciating detail. That might not be everyone’s cup of tea to read, but it’s all there. It draws some quite subtle conclusions on when debt-financed stimulus works and when it will be counterproductive.

The message from this for the Treasury is clear: be careful at these levels of debt, when fiscal multipliers are low, long-term growth is also low with high interest rates. And so we are likely to see in the MTBPS the Treasury spending a large chunk of extra mining tax revenues this year and saving only a small amount for future years’ state-owned enterprise risks, while also keeping the medium-run path back towards a primary balance. This path to a primary balance can be relatively slow (not hitting a brick wall) given the supportive backdrop from terms of trade, but the path still needs to be set to ensure debt is sustainable.

The stakes on debt sustainability were increased here last week when the International Monetary Fund (IMF) actually put out a lower long-term GDP forecast of 1.3% (negative in per capita terms), when it was at 2.3% a year ago. The Bank also has put longer-term growth below 2%. We wait to see what the Treasury does with long-term growth in the MTBPS.

SA exceptionalism

Maybe there is some SA exceptionalism that creeps into the demands to destroy orthodoxy. A view that SA is not a small, open emerging market with a productivity and skills problem, so doesn’t have to abide by the “rules”, though about 30% of government debt is owned by foreigners and banks have to operate in a globally regulated system.

If you don’t believe there are constraints to debt and then a large economy from GDP rebasing magically means you can carry more debt forever, then there can be no problem here. Yet such a view ignores the fact that the statistics on GDP are 11% bigger, but the ACTUAL economy is no different in size. The underlying capacity to generate jobs and taxes were what they were in that respective data. This is why I find the argument that somehow because Stats SA has revised the size of the economy up that there is magically more tax to have been collected nonsensical.

Models such as those of Applied Development Research Solutions (ADRS) can be put forward showing positive outcomes from fiscal stimulus, but the truth is we have no idea why this is the case with this model as its details are not published. Black box modelling like this is not helpful to the public discourse — as the Bank’s Chris Loewald and colleagues laid out in a paper last year. The model is also receiving strong pushback in academic circles and those doing actual advisory work into the government on the basic income grant. Maybe it all works and is correct, but we have no way of knowing because it is not laid out.

By contrast the Bank’s macro models are all transparently published and their updates are pored over in excruciating detail by analysts after ever monetary policy committee meeting.

Orthodoxy then is not quite as dusty and stale as it’s made out. It is constantly challenging itself, remodelling itself and publishing peer-reviewed articles on itself. It needs to be challenged for sure, always to keep a socially progressive lens, but this doesn’t mean ripping the whole thing up.

• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.

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