Following another year of sluggish growth and revenue under-performance, Minister Mboweni’s 2020 budget had to achieve a near-impossible balance between fiscal consolidation and support for economic recovery.
It is not just that real gross domestic product (GDP) growth was low – inflation and nominal growth were also well below expectations, contributing to both lower revenue and higher real debt service costs. This indicates a failure of monetary and fiscal policy coordination. It has made the budget challenge that much harder.
Subsequent to the Budget, Statistics South Africa announced that GDP had fallen by 1.4 percent in the fourth quarter of 2019, following a decline of 0.8 percent in the third quarter (seasonally adjusted and annualised). With the economy in recession, earlier plans to stabilise government debt at around 60 percent of GDP are no longer feasible. Even without the COVID-19 impact, the Moody’s downgrade was likely. The Budget relied on a renegotiation of the public service wage agreement for 2020 and resolution of the financing requirements of Eskom and other state-owned companies, alongside implementation of a growth-oriented structural reform package. None of these were ever likely to be achieved by the Moody’s decision date of end-March 2020.
Now that South Africa is in lockdown and the world faces an economic decline that will be deeper and more rapid than the 2008 great recession, both fiscal consolidation and support for recovery will have to be deferred.
The world has changed and both monetary and fiscal policies at the national level will have to adapt to the unprecedented challenges of the COVID-19 pandemic and the economic impact of the lockdown.
In addition to its lowering of the repo rate, the South African Reserve Bank (SARB) has announced several measures aimed at injecting liquidity into the financial system and making it easier for banks to accommodate businesses that face temporary revenue losses. The SARB has also announced that it will purchase government debt in the secondary bond market. This is a quantitative easing (QE) measure in response to the rapid rise in long-term interest rates and increased risk aversion in the capital market in recent weeks. We should expect to see substantial increases in “open market purchases” of this kind in the months ahead, possibly including financial sector and corporate securities, as has characterised the United States (US) and European QE programmes.
As a backstop to these domestic monetary support measures, consideration could be given to the International Monetary Fund and World Bank facilities and the US Federal Reserve’s currency swap arrangement, taking into account South Africa’s dependence on dollar-denominated trade and investment.
Global financing facilities to assist countries in recovery from the economic fallout from COVID-19 response measures are likely to surpass anything seen before in scale and rapidity of deployment.
The Treasury will need to finance a large intervention over the next year or eighteen months, not just to meet COVID-19 response needs but also to support economic recovery in a context of collapsed global trade, incomes and investment.
There are a wide range of collaborative initiatives underway between government and private hospital groups and health product suppliers. A massive increase in COVID-19 testing and a more differentiated approach to preventing the spread of the pandemic in communities will be needed in the months ahead – these will require supplementary health expenditures and improved coordination of local and regional social control measures.
There is already some progress in terms of easing the terms of credit to businesses. This will need to be supported through fiscal measures, perhaps in the form of a wholesale guarantee fund to backstop credit easing facilities administered by the banks.
Increased demands on the fiscus will raise the deficit this year to over 10 percent of GDP, and will need to be accompanied by even more stringent curtailment of public service salaries, combined with either the curtailment or termination of lower priority spending programmes. These circumstances might provide the catalyst needed to launch long-overdue reforms of the Road Accident Fund, Skills Education Training Authorities (SETAs) and the skills funding system, dysfunctional state-owned companies, and ineffective capacity building programmes.
But the most immediate challenge is to compensate for the impact of the lockdown on ordinary livelihoods. Perhaps a million people have lost their jobs this week, and many millions face reduced incomes and increased vulnerability. A new Temporary Employment Relief Scheme (TERS) has been announced as an initiative of the Unemployment Insurance Fund (UIF), and consideration is being given to supplementary social assistance payments targeted at households that are reliant on informal sector activity who are unlikely to benefit from the UIF or business support measures.
In the longer term, government will have to expand its employment relief programmes, and strengthen industrial and other policies that assist in boosting the supply-side of the economy.
The inequalities and deficiencies in housing, water and sanitation, public transport and social amenities that accentuate health risks in our social landscape will have to be addressed with vigour. We will perhaps experience greater changes in social and economic organisation in the period ahead, than the world has seen since the end of the Second World War.