In a series of short articles, I will write about how to run a government that encourages economic growth with stable policies, something that is much needed here in South Africa.
In this article I write about a buzzword that has been making headlines courtesy of the German government over the last few years: Austerity. In the very basic format, austerity is when the government tries to save any unnecessary costs and cuts down on their spending. In general this is seen as a good thing, and thus should be endorsed. Germany is the most prominent country advocator of it. They have managed to present a balanced budget, thus they would not need to incur any new borrowings. Thus they have been trying to force everybody else to follow suite, with mixed results. The Greeks for one, can’t stand the word and are trying to get away with less. Brazil ended up in a recession, partly due to the government’s austerity drive.
So is austerity really the medicine everybody need to get their economy on a track for growth? The basic idea is right, the timing if when to do it is almost more important though. It is good to save some costs while the economy is on a sustainable recovery, and the private sector is beginning to boom again. It can have the opposite effect however, if the economy is in tougher times. Just imagine yourself running a business, and just as trading slows down, and you are more reliant on existing customers, the biggest of them all tells you that they are focusing on saving money, thus they will not buy as much anymore. Since most governments contribute between 25% and 35% to the local economy, they are most certainly the country’s biggest “customer”. John Keynes already said that governments should run counter-cyclical budgets, ie save in the good time and spend in the bad times.
But what should countries like South Africa, Greece and Brazil do, whilst they are in a situation where it is almost impossible to spend more (because of debt restraints)? Should they spend their way out of their situation or are they better advised to embark on austerity? Well certainly most of the countries facing such difficult economic times have a third option – make the private sector as attractive as possible to investors. That means reduce tariffs, get rid of restrictive policies and red tape, show that the rights of investors are upheld in courts and focus on reducing corruption. Without much fiscal spend, the governments would be able to make their economies more competitive, more lucrative to investors who would be more willing to take a risk and invest in the hope of benefiting through the up-cycle.