Published in Business Day 17. April 2020.
The SA government will double its fiscal deficit in response to the Coronavirus crisis and its impact on output and incomes. The losses in output and incomes from the lock downs may be of the order of one trillion rand of sacrificed output and incomes. They will certainly be large, perhaps as much as one trillion rand of lost output, or the equivalent of 25% of GDP in 2019. We can only hope the extra government spending is highly effective and well directed to minimize the damage caused. It will help close the output gap, the difference between much lower realized GDP, and what might have been GDP, without the lock downs. Encouraging more demand for goods and service will helpfully also increase the supply of them and increase incomes accordingly.
A spirit of generosity rather than any niggardliness is the right way for the government to approach its responsibilities for the economic damage it has inflicted. It should however be made very clear that whatever relief it offers and how offered is temporary in its nature. It is an urgent response to a grave emergency. Policies for the long term remain to be determined in the usual considered way, subject to all the usual due process. We are hostage to a crisis – not to the future.
The government should therefore hope to raise the emergency funds it intends to spend as cheaply as possible. This means borrowing at the short end of the bond market at very low rates of interest- as close to zero as we can get them. And we can get these short-term interest rates as low as we choose to set them. The shortest and cheapest way to fund the surge in spending would be to create money to the purpose. This is what every central bank in the developed world is doing enthusiastically and without shame. We should be doing the same as unapologetically.
The developed world faces much lower long-term interest rates than we do. They can issue long term date without paying much interest at all. And their borrowing costs are as low as they are because of the willingness of their central banks to buy vast amounts of government bonds in the market. This process now known as Quantitative Easing (QE) is money creation by another name. Their central banks are doing vastly more bond buying and additional lending to banks and businesses in response to the economic threat posed by Coronavirus. And they are creating much more money and holding down the interest their governments must pay for funds.
Addditional central bank money comes mostly in the form of bank deposits held with a central bank. The supply of money in SA increases every time the Reserve Bank makes a loan to a bank or buys foreign exchange or government securities in the market. Money in the form of additional bank deposits(cash) held with the Reserve Bank would also increase should the Treasury draw on its own considerable deposits with the Reserve Bank to make payments. It has over R160b in its deposit account with the Resbank and presumably does not need Reserve Bank permission to draw upon. If so it can do its own money creation.
The high cost of the RSA borrowing on a long term basis – 10% p.a. to borrow rands for ten years – is even more reason for us now to rely on the central bank to assist in a sensible funding plan for Corona virus relief. It means bringing down short rates further and sharply. And making enough extra cash available to the banks and other eligible borrowers on favourable terms, so that the banks can fully support the market in issues of short dated, low interest paying, Treasury Bills and Bonds. Supporting issues of short term debt that will and should be growing rapidly to fund the extra spending. We should fully eschew long term borrowing for now and replace maturing long term debt with short.
All the world including SA will be set for a post-Coronavirus battle over the future scope of government spending. On how much the government should intervene. The left will want more intervention – more spending – more regulation – more taxation of the wealthy – and will fudge the dangers of relying on central banks to cover larger fiscal deficits. Monetising government is very likely to be inflationary if done permanently on a large scale. But it will not be inflationary in SA for now- not until after the crisis. When we can get back to a new normal- that will include sensible monetary and fiscal policy.