Treasury, SARB charter austerity path despite evidence it’s globally failed

Redge Nkosi is the founding director of the London-based Monetary Reform International and the executive director and research head for Money, Banking and Macroeconomics at Firstsource Money.

Redge Nkosi is the founding director of the London-based Monetary Reform International and the executive director and research head for Money, Banking and Macroeconomics at Firstsource Money.

Published Mar 5, 2024


This year’s Budget, coming during a crucial elections period, and three decades of the ANC rule, was expected to excite keen attention from budget analysts, market watchers, and politicians, including foreign financial institutions to which both the Department of Finance and the SA Reserve Bank (SARB) endear themselves greatly.

Indeed, as expected, this austerity budget was received warmly by the so-called markets, save for murmurings of discontent from the usual quarters of society known as leftists. The rand behaved.

A credible austerity budget, so it is said, is one that elicits warm cheers from bond, forex and similar markets and, more importantly, from international financial institutions such as the International Monetary Fund (IMF), the World Bank, the Organisation of Economic Co-operation and Development (OECD), rating agencies etc. These institutions are deemed to have unimpeachable macroeconomic nous and credibility.

South Africans have been conditioned, through a series of strategically targeted and co-ordinated deliberate narratives in various forms of media, to think that austerity (government budget cuts and tax increases) inexorably lead to low debt, growth, prosperity, and job creation.

This is despite this intellectually bankrupt case of austerity having been laughed out of debate all over the world and all economic research for its support thoroughly discredited, a high rarity in the history of economic thought for an issue to have been so categorically rejected.

Austerity undermines growth, creates inequality, does not reduce debt nor brings prosperity at all, save for the very few elite. Yet, in South Africa, most economists, media, politicians and society at large applaud austerity.

So, why is it that the Treasury, supported by the SARB and the Presidency, continues with this austerity campaign and the large populations go along with it?

Why is it that these institutions continue to inflict a heinous cost on this economy, among the most expensive economic dislocations in terms of resource misallocation and its associated destruction of economic value, only comparable to the crimes of apartheid and colonialism?

The corrupting influence of the local elite, big business and their foreign counterparts together with foreign international financial institutions, using their infrastructural and instrumental power, can only explain this pervasive form of policy, regulatory and intellectual capture of society and state.

For about 12 years, austerity has failed to achieve any of the stated goals in the 12 budget years. Why are the deliberate economic misconceptions about austerity continually being propagandised by the Treasury and the SARB without any academic backing?

Shouldn’t the country begin to worry about these institutions? Would the Budget and the actions (practice) of these institutions meet constitutional muster?

As for careful macroeconomists, who have long warned of these disastrous economic policies, the analytical lenses were not necessarily trained on the Budget per se, but rather at clues for shifts in the macroeconomic paradigm.

Expectedly, they found none in this 2024 Budget, as in the previous ones. With this, no doubt then that the highest national security risk for South Africa sits with this foreign-orchestrated macroeconomic policy regime.

What is known to careful macroeconomists is that the framework used to analyse fiscal sustainability, or debt sustainability, upon which austerity decisions are made is from an economic doctrine that is well discredited.

The loanable funds doctrine, recently thrown out as meaningless by all major reserve banks, following solid empirical arguments from careful research economists, and lessons leart from the 2007/8 crisis, forms the analytical pillar of South Africa’s budget statement that supports this destructive fiscal austerity. The framework’s assumptions are inapplicable to South Africa, and in fact to most countries.

This extends beyond fiscal austerity to the monetary austerity we face today, the perennially high nominal and real long-term rate as well as the debt management programme we practice.

What is also true is that since the 2007/8 crisis, all countries that turned to severe austerity as the one we have here saw their economies suffer.

Just as South Africa was starting its failed austerity in 2012/2013, the IMF, through its chief economist, issued a mea culpa for destroying Greece through their misguided austerity recommendations, yet they continue to support the same destructive policies here, and Treasury is happy to undermine growth.

While welcoming their Budget, local and foreign financial institutions have cautioned the use of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) unrealised profits that sit at about R500 billion.

Their main concern is the so-called independence of the Reserve Bank and the possible SARB insolvency risk that may arise from the reversal of the rand (if it gains, the account turns negative). They are not worried about the policy failure of the SARB that led to this GFECRA account ballooning.

The one-way weakening of the rand denotes an ever-eroding value of the currency. The productive capacity of the country is being knocked down daily by financialisation and de-industrialisation, which are macroeconomic policy phenomena, mostly monetary.

The very high rates can only encourage speculation (hot money) which the SARB terms “investment”. Why should any person want to put up a factory when they can make easy money gambling the bonds and the rand?

Instead of crediting the Treasury with R250bn of GFECRA money, the agreement between Treasury and the SARB says that R100bn should be given to the SARB, to deal with “insolvency” risk.

There is an indemnification of the SARB for losses it may make, a uniquely British approach that South Africa has now copied. There is no need for this arrangement at all.

These analysts are worried about the possible loss that the SARB may make as a possible reversal of the rand and matters of sterilisation. Taxpayers’ money must stand ready to bail out the SARB. In other words, reward the SARB for its poor monetary policy decisions.

International experts are said to have advised the government on this matter. However, insolvency is an irreverent concept for reserve banks.

When reserve banks make losses from either interest rate rise or related activities, the practice is for them to wait for their return to profitability. The need to burden taxpayers should not arise; after all, reserve banks create money from thin air.

Recently, the German reserve bank (Deutsche Bundesbank) lost about R400bn. The cost of their monetary policy decisions are not going to burden the German taxpayer. This is the practice in almost all reserve banks, save for the UK, which is also under pressure to review this approach of penalising the citizens for its poor monetary policy decisions. There are many such losses in a number of reserve banks today.

Furthermore, the monetary policy decisions of a reserve bank are in no way affected by its loss or profits. While each reserve bank will be affected by its own accounting framework: accounting approach, income recognition and distribution rules, these should not in any way worry the SARB and the country about its insolvency. We should ignore misplaced worries from these budget commentators.

In short, applauding this Budget is to applaud a defunct macroeconomic regime whose outcomes are the condemnation the majority of the citizens to perpetual poverty, unemployment, inequality, high cost of living and doing business. Economic security for the majority of citizens is needed now. South Africa is in dire need of macroeconomic reforms.

Redge Nkosi, @redgenkosi ,is the founding director of the London-based Monetary Reform International and the executive director and research head for Money, Banking and Macroeconomics at Firstsource Money.