Treasury asked to ease up on fiscal austerity
- Michael Sachs
Michael Sachs, former head of Treasury budget office, says less austerity would lead to more credible outlook
The National Treasury should implement a less stringent path of austerity than that proposed in the medium-term budget policy statement (MTBPS) as its plan will have far-reaching effects on service delivery.
This is the view of the head of the Public Economy Project (PEP) at the University of Witwatersrand’s Southern Centre for Inequality Studies, Michael Sachs who previously headed the Treasury’s budget office.
“I think less austerity would be better,” Sachs said after his presentation to parliament’s two finance committees in public hearings on the MTBPS. “A more gradual path to debt stabilisation will allow for less debilitating expenditure adjustments and a more credible outlook.”
Sachs said the Treasury’s fiscal stance would be a “headwind” to economic growth as state consumption spending was projected to contract in real terms in 2026 and 2027, reducing the growth rate of aggregate demand in the medium term and perhaps for the next decade. The Treasury has projected reduction in noninterest spending from 23.4% of GDP in 2024/25 to 22.4% in 2027/28.
It would also lead to a permanent contraction in the size of the state and probably lead to an increase in unemployment, inequality and poverty. Sectors such as education, health and policing would bear the brunt of the fiscal consolidation.
“The spending path in our judgment will lead to a retrogression of constitutional rights,” Sachs said. “If the government is taking a path towards retrogression, it needs to make this explicit and explain why.”
He was critical of the government’s “lawnmower approach” to cutting services where everything was cut instead of being more targeted.
This, he said, was the worst possible approach, though politically the least painful. Unlike the Treasury — which achieved a primary surplus (when revenue exceeds non-interest expenditure) in 2023 and projects one of 0.9% of GDP in 2025, 1.4% in 2026 and 1.8% in 2027 — PEP foresees a primary surplus of only 1.1% being achieved in 2026, improving to 1.4% the next year.
The project expects some fiscal slippage from the Treasury’s projections of the main budget deficit and debt to GDP. Whereas the Treasury foresees a deficit of 3.4% and debt to GDP of 75% in 2027, the PEP projects 4% and 76.5%, respectively, with the deficit rising to 5.9% the next year against the Treasury’s expectation of 4.3%.
The Treasury projects that debt will fall to 67% of GDP in 2032, but PEP says another eight years of austerity will result in debt falling by only 8.6% of GDP. “This cost will be felt through declining quality of healthcare, education and other government services. This is a large cost for very little gain.”
Sachs also warned that reducing the inflation target as Reserve Bank governor Lesetja Kganyago would like to do would make it doubly difficult for the Treasury to achieve its fiscal goals.
Further disinflation would lower the rate of nominal GDP growth and raise the gap between growth and interest rates. “This implies the need for the Treasury to inflict harsher expenditure cuts to reduce debt levels and achieve its debt stabilisation targets,” he said.
“Is government proposing a combined fiscal and monetary contraction at this moment when all of the talk is about a revived path of growth? What will be the implications of that combination on the path of growth?”
Among PEP assumptions are that public sector pay budgets grow by consumer price inflation (CPI) plus 1.5% a year for three years; revenue remains the same with no tax rises; Eskom support is included “above-the-line”; and moderate support is given to SOEs (with about R20bn included “above the line”).
This article first appeared on BusinessLive. Michael Sachs is an Adjunct Professor at Wits University and PEP Lead at the Southern Centre for Inequality Studies.