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24/02/2018 13:20 SAST | Updated 24/02/2018 13:20 SAST

Should South Africa Really Fear A Budget Deficit?

That fear unites South Africans – from economists, politicians, businesspeople, right- and left-wingers, to the common man.

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There is perhaps no other single issue that unites South Africans, from economists, politicians, businesspeople, right- and left-wingers, to the common man, than the fear of budget deficits – and with it, the fear of debt and inflation.

Something must be profoundly amiss if this group of vastly different people can agree to be completely incorrect. The fear of deficits is concocted from much discredited and lazy ideological economics, powerfully disseminated by economists as truth, yet ungrounded in any empirical evidence.

It is one intuitively simple but compelling economic message: consolidate fiscally by cutting spending and raising taxes, lest we face hyperinflation horrors like those of all fiscally irresponsible nations such as Zimbabwe, Venezuela, Germany etc.

To go against this widely received "wisdom", as I always do, is to incur national ignominy from self-regarded economic cognoscenti. Yet this intellectually bankrupt doctrine, backed by questionable academic research, withers under scrutiny, and has therefore rightly retreated globally among all self-respecting economists.

Somehow, it however remains stubbornly current among South African economists.

Balancing the economy, not the budget, to enjoy full employment and high investment in the nation's capital stock are the ultimate responsibilities of government and public policy.

In a shocking admission in a 1995 interview, Nobel economist Paul Samuelson acknowledged: "Once debunked... the superstition that the budget must be balanced at all times takes away one of the bulwarks that every society must have against expenditure out of control..." and also that "one of the functions of old-fashioned religion was to scare people".

Here, the economic priesthood openly conceding that budget-deficit fear is mere superstition.

Ideally, the target for any knowledgeable government is not the setting of an arbitrary deficit target informed by fear of debt, interest payments and inflation, but by the levels of existing unemployment and of public capital stock deficiency. The ultimate responsibilities of government and public policy are to balance the economy, not the budget, to enjoy full employment and high investment in the nation's capital stock.

There can never be any greater guiding macroeconomic principle than this, otherwise the state's role, legitimacy and capacity to project both external and internal power will be undermined and weakened – and deficits are central to this.

After all, government spending adds new money into the economy and deficits in state books are surpluses in the private-sector accounts.

By saying it has no money, government is effectively saying it has no choice but to use privatised systems of money supply and going into debt. Once in debt, it claims, it will have to pay interest. This entirely ignores the state institutions' ability to develop debt-free money, which the state has the sole prerogative to create. Their main argument against the state relentlessly creating money is that it's inflationary.

Besides being empirically unsupported, they ignore the fact that the privatised money creation from banks, as debt or bonds to finance deficits, can also be equally inflationary. Lack of intellectual clarity as to what money is, dynamics about its creation and allocation, fused with the poisoned reasoning about deficits and inflation, strangle this economy.

To condemn generations of South Africans to untold misery on the altar of budget-deficit myths, debt and inflation fears is mind-shatteringly immoral.

SA's macroeconomic policy muddle has its source not only in the superstition about deficits, but also in the application of microeconomic doctrines in the search for macroeconomic solutions – what Harvard's professor JK Galbraith described as, "The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not reveal it".

In October 2017, recently retired fovernor of the Federal Reserve board, professor Daniel Tarullo, wrote: "The substantive point is that we do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy-making".

Professing similarly was Janet Yellen, the retired Fed chair saying she does not know "what determines inflation" with Financial Times' Martin Wolf summing up, "Only the ignorant live in fear of hyperinflation". And yet, here we are definitively claiming to know it all. To condemn generations of South Africans to untold misery on the altar of budget-deficit myths, debt and inflation fears is mind-shatteringly immoral.

Clutching at any straw to anchor their irrelevance, the delusional economic and political establishment add 'policy uncertainty' and lack of 'confidence' as policy escape hatches to hide their ignorance of real policy alternatives for SA.

This economic misunderstanding was condemned in the strongest possible language at a meeting of 18 Nobel economists in Lindau, Germany in 2014. Professor Christopher Sims of Princeton University threw the first and hardest punch, saying anyone who feels threatened by inflation is stupid. His call was echoed many more times by other nobel laureates.

South Africa's development model and its macroeconomic framework are built on a pile of myths and a false understanding of our monetary system. Clutching at any straw to anchor their irrelevance, the delusional economic and political establishment add "policy uncertainty" and "lack of confidence" as policy escape-hatches to hide their ignorance of real policy alternatives for SA. Even lack of empirical support fails to dampen their enthusiasm.

Unless South Africa unambiguously crosses an intellectual Rubicon in the field of macroeconomics; deficit, debt and inflation fears and the resultant fiscal consolidations will not only remove the ANC from power soon, just as it did in Germany, irrespective of Ramaphosa's win, but will also hasten the occurrence of what professor Adam Habib feared as a "deferred revolution".

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