- SA didn't really gain impetus in economic growth sufficiently after the recession a decade ago - many of those challenges are still with us.
- Fiscal policy takes time, since it relies on investment and for projects to roll out. However, monetary policy is much quicker and there is a lot that can be done in a year.
- Business and government have to work together.
- There is no reason to prescribe investment in a certain direction, argues the author. If projects make sense, capital will find a way.
The combination of the pandemic and a decade of weak growth has left the government’s budget deficit to GDP ratio at all-time highs – expected to reach an unprecedented 14.6% of GDP, or a borrowing requirement of up to R770 billion – and little room to work with.
What's more, there are limits to what fiscal policy can do in the short term to address the problems posed by the pandemic and, as such, one has to raise the question of sustainable government finances in a post-pandemic world.
In a recent discussion titled Road to Economic Recovery with Prof Andrew Donaldson, former Deputy Director General of National Treasury argued that we didn't really gain impetus in economic growth sufficiently after the recession a decade ago, which saw big structural challenges, the need to accelerate employment creation to expand investment in the economy and to build living standards that are sustainable, through municipal investment and housing investment.
Those challenges are still with us. As such, to get the economy moving again in the second half of the year, and into next year, we're going to have to address the short-term challenges of an economy that is under shock, no profits, a big hit on employment fiscal revenues and we're going to have to accelerate progress on the kinds of structural change that the economy needs to achieve longer term sustainable growth.
Fiscal vs. monetary policy
Fiscal policy takes time, since it relies on investment and for projects to roll out. However, monetary policy is much quicker and there is a lot that can be done in a year.
However, what government really needs is for longer-term rates to fall.
The Reserve Bank has acted to lower rates at the short end which, if fed through into the wider economy, has an economic benefit of around R100 billion – which is quite substantial. However, it does little for government finances. It’s the capital market rates that really count.
As such, there’s a need to get the cost of funding down - an important precondition to the sustainability of our public finances - and to re-open the capital markets for the private sector for sustainable long-term growth gains.
Output may only reach its pre-Covid level in 2023. So, in terms of getting the capital market inflows in to bring down longer term rates, the big question is where is growth likely to come from?
What is needed are projects that are "shovel ready" and that can effectively "crowd in" the private sector. However, policy certainty is needed for this to happen. We want to try and create an environment and a policy framework that encourages growth but to do so, we have to address these very substantial budget deficits, and at the same time, re-look policies.
If there is certainty, and an increase in confidence, the slope of the yield curve could flatten. However, we really need to see a growth trajectory and the removal of uncertainty about policy.
There are also discussions around the domestic savings pool and how government could look to potentially tap into this. Referring to possible changes to Regulation 28 of the Pension Funds Act, to access funding for fiscal policy, Donaldson said he wasn’t concerned about South Africa’s financial architecture, which he felt was not a constraint on growth as projects get put on the table.
It's the project development and investment decision making side of the equation, he argued: That is where the decisions have to be taken, where the action is urgently needed. There is no reason to prescribe investment in a certain direction. If projects make sense, capital will find a way. But we need to think proactively about those parts of the economy, particularly investments in township development, upgrading in municipal infrastructure associated with improved living standards, as a top priority for the period ahead.
There are very substantial reforms of public finances that are needed, and progress needs to be made on key aspects that will take us over the next three to five years into a position of lower government deficits, shifts in the balance between private sector activities and what government takes responsibility for that are sustainable and that can absorb the rising numbers of work seekers who for so long, have faced difficult labour market conditions.
It’s also not about public vs. private sector anymore, it’s about a blend of the two approaches. Similarly, on the financing side. Banks and financial institutions have the resources to bring the finance into the housing and industrial investment but that needs to be complemented by subsidies in some areas. It doesn’t have to be a choice between government or business.
Government revenue implications
Finance Minister Tito Mboweni has pledged an active approach to fiscal discipline, as a means of reducing the Budget deficit and lowering the debt-to-GDP trajectory. However, the minister did not provide much in the way of detail. This is expected to emerge in the October MTBPS and February Budget Review. An active response has been formulated, which involves revisiting the 2021 medium-term expenditure framework. This commences this month, with the starting point principles of zero-based budgeting.
Areas that needed to be looked at in managing government finances are the public sector wage bill, as well as the substantial support provided to state-owned enterprises (SOEs), which has been a major driver of the rising Budget deficit over the last few years. Mboweni has had little to say on SOEs, apart from allocating R3 billion extra to the Land Bank.
Tax increases of R40 billion have been mooted over the next four years. However, these are unlikely to be in form of personal income or corporate income tax. Under discussion is a solidarity and inheritance tax.
Looking at the positives
There, of course, could be some support for the economy in the form of pent-up demand as the economy opened up and we move through the lockdown levels and we may be pleasantly surprised by the buoyancy of the consumer. Closer cooperation and opportunities for public-private sector partnerships in infrastructure development are making progress.
A critical factor, however, will also be the extent to which Eskom has managed to catch up on its maintenance work to ensure more reliability of supply. So will be the introduction of independent power suppliers and renewable sources of power. And while there has been a lot of engagement between government and other stakeholders, in the end, what is needed is government leadership.
We are not going to get to a realignment of business investments, to the reopening of global trade or to the regulatory changes we need without government action and without an engagement between government and business and finding the right balance between what government does and what the private sector does. We need to recognise the depth of the challenges we face, and it cannot just be talk. It needs to be action. It needs to be decisions.
Tertia Jacobs is Treasury Economist at Investec. Views expressed are the author's own.