STUART THEOBALD: Welfare and growth — SA can’t afford to take bad decisions

Posted in: Economics, i-Blog on November 15, 2021


Science can help us make the best choices on whether welfare can be funded without economic growth, or if higher debt causes weaker growth.

This column was first published in Business Day. 

Economists like to believe that what they do is scientific. Many are right. They create models that represent behaviour in an economy and use them to make predictions that can be tested. They publish papers marshalling evidence one way or another. Some models become widely accepted as their explanatory power is corroborated.

Policymakers should aim to work with these. This leaves them open to accusations of “orthodoxy”. They must deal with such accusations by becoming applied theorists — testing policy options and gathering evidence directly. This is what the much-hackneyed phrase “evidence-based policymaking” is meant to be about: identifying a set of feasible policy choices, then testing to see which option delivers the intended outcomes.

The issues being considered can be highly contested. They can concern fundamental questions such as the responsibilities we have to ensure the least well-off live good lives. They can also be influenced by elites protecting their own interests. This can sometimes make it difficult to let the science happen without interference.

This contested terrain is no more apparent than in arguments about social welfare in SA. There are strong emotions and ideological commitments: welfare is about supporting the most vulnerable. There are also obviously vested interests: welfare must be paid out of tax revenue, reallocating wealth from the rich to the poor.

On one end, advocates have argued for a universal basic income grant: a no-strings-attached payment that is made to everyone. On the other end, some argue social welfare causes economic malaise by creating a dependency culture. If any must be paid it should be narrow and drive improved behaviour leading ultimately to self-sufficiency.

We need the rigorous science to help us decide. The National Treasury gave some of its answers last week in the medium-term budget policy framework. Social welfare is not going to be provided out of increased debt spending. The Treasury is bedding down the consolidation that has been taking place in the past two years to turn the dramatic escalation of debt that the country has built over the last 10 years (it is still growing, but the peak at least is now in sight).

“Weak growth is compounded by the rapid increase in public debt,” it said. Moreover, “government will continue to consider measures to support employment growth [but] joblessness cannot be solved by fiscal resources: it requires strong and sustained economic growth”.

The Treasury is saying that welfare cannot be funded without economic growth. It is also saying higher debt causes weaker growth.

There has been a series of arguments from think-tanks such as the Institute for Economic Justice, allied by the likes of former Goldman Sachs SA CEO Colin Coleman, that challenges this. They argue for substantially expanded public welfare in the form of a universal basic income grant. The clear case made for such an approach is the moral imperative to support the most vulnerable. But they recognise that debt can’t alone do the job of paying for such a large increase in spending, so advocate tax increases and argue that growth will be substantially stimulated by such welfare payments.

In contrast, the Treasury argues that spending enhances growth more when it is investment rather than consumption. It is protecting planned investment in infrastructure, which means limiting welfare spending and other consumption line items like wages.

Different policy options

We therefore have very different policy options. Will growth be stimulated best by increased welfare spending and higher taxes, or will it be achieved best through targeted spending on investment that supports economic activity? The good news is that these questions have been much studied. The Treasury has in fact modelled a lot of them itself. Given our history of welfare spending in SA we should have data to decide whether you get economic growth with high multipliers. I would be intrigued to see the model that suggests this outcome, and then data showing it has been observed in specific cases.

There are further questions that can be settled on the science. Can SA increase taxes to fund higher welfare? What are the economic effects of doing so? Obviously higher taxes mean lower spending by those who are taxed. It may also mean less economic activity as those being taxed keep less of each marginal rand earned by doing more work (at least in SA).

Again, the literature is replete with good models to assess these effects, and we should be able to find good data in SA. If we cannot raise substantial revenue from additional taxes, are we kidding ourselves that welfare increases can be done without increasing debt levels? And if the debt outlook deteriorates, what then does that mean for growth? And if growth continues to be weak while spending grows, what happens eventually?

The one thing I know for sure is that we cannot afford to take bad decisions. The state capture years turned a robust government balance sheet that had massively increased welfare spending into a subinvestment grade mess that was an existential risk to the country. We must make the best decisions, which means bringing the best science to bear.

Theobald is chair of research-led consulting firm Intellidex.

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