The purpose of the President’s address on 21 April was to announce measures to stabilize the economy, address demand and supply constraints, and protect jobs in order to address the challenges associated with the COVID-19 epidemic. The size of the package of measures shows that the government is clearly aware of the financial and economic damage being wrought by the epidemic and the policies necessary to manage its spread. We shall have to wait for a couple of days until the post-lockdown dispensation is explained to us.
This brief sets out the key features and implications of the announcements.
1. The measures are a mix of direct expenditures by the state, tax concessions, protection of jobs, governments, government loan guarantees to banks and expansionary monetary policy. The table sets out the measures in each category.
|
Category |
Measure |
Amount (R billion) |
|
Direct expenditures |
Department of Health additional expenditure Transfers to municipalities for water, sanitization, and food and shelter for the homeless Additions to social grants |
20 20 50 |
|
Tax concessions |
Four month holiday from skills development levy Tax deductions for contributions to the Solidarity Fund Deferred payments |
70 (relief to cash flow) |
|
Protection of jobs |
Special UIF benefit Other (unspecified) Total |
40 60 100 |
|
Government loan guarantees to banks |
To assist enterprises with operational costs |
200 |
|
Expansionary monetary policy |
Recent 200 basis point cut Provision of additional liquidity to financial system |
80 (estimated stimulation) |
This collection is described as a R 500 billion package, a rhetorical flourish, since one cannot add apples to oranges.
2. The financing implications are obscure. Direct expenditures have a direct fiscal impact. So do the skills development levy, tax deduction and the interest foregone in deferred payments. The net burden of tax concessions on the fiscal system are not the same as cash flow relief to businesses. The special UIF benefit will be financed by drawing down funds invested with the Public Investment Corporation (which will in turn require the PIC to sell shares, with an impact on share prices, but not on the fiscal system). How the balance of the funds for protection of jobs will be financed and allocated is not known. The fiscal burden of government guarantees of loans by the banks to enterprises will depend on how many of these loans will turn out to be bad. Expansionary monetary policy has no direct impact on the fiscal system but, to the extent that it stimulates the economy, it should have a favorable effect on tax collection down the line.
Financing of the fiscal impact of the package will come from three sources: reprioritization within the Budget as presented in February 2020, foreign borrowing and the additional sales of government bonds. It is implausible that R 130 billion can be re-prioritized within the current budget. We also do not yet know what will come of efforts to find reasonably priced foreign loans. It follows that the need for additional sales of government bonds and the impact on the prices at which these can be sold are not yet knowable.
3. It is proposed that a grant of R 350 per month for the next six months will be paid to individuals who are currently unemployed and do not receive any other form of social grant or UIF payment. No-one who has proposed this measure has ever explained how selection of the unemployed will take place. An unemployed person is a person who wants to work but has none. But everyone who is not employed will want to work if a grant depends on it. The Quarterly Labour Force Survey indicates that there were 22.3 million people between the ages of 15 and 64 who were not employed. You can take off the recipients of disability grants, old age grants and UIF recipients from this total, and still be left with at least 18 million people. Quite apart from a cost of R 6.3 billion per month to give them all a grant, imagine trying to register them in six months.
4. There were two key omissions. First, there was no mention of South African Airways. No doubt, a luta continua. Secondly, although it has become clear that the lockdown has radically damaged the ecology of the informal sector, there was no attention paid to restoring it as far as possible in the next few months. Perhaps more will become clear by the end of the week.
5. It is clear that the 2020 Budget will have to be redone. The Minister of Finance does not himself have the capacity to deal with the programme through emergency funding provisions. Amendments to the budget will have to be introduced and piloted through parliament by the end of July. Parliament will have its work cut out to cope.
6. The Minister of Finance has been reported to be worried about whether it will be possible to end the emergency measures. Even if these reports are wrong, he should be. There will be forces wanting to continue them forever. Only a properly worked out revised and credible fiscal framework over the medium term will reveal what is possible and what is not. The need for emergency funding now will constrain the expansion of the welfare state in the coming years. An irony should not be overlooked. Many of the people pressing for considerably greater permanent transfers through the state may be horrified by the unintended consequences of their success: harsh structural adjustment down the line, imposed by hated institutions.
Charles Simkins
Head of Research
charles@hsf.org.za
