A pragmatic approach to saving the economy

 

28 June 2020

By Edward Kagiso Molefe and Nico Keyser

Not much room for Mboweni to move

The 2020 supplementary budget comes at a time when the COVID-19
pandemic is causing disruption in the world economy.

According to the International Monetary Fund, the world economy is expected to contract by 5.2% this year due to the huge lockdown to curtail the spread of the virus. The South African economy is also expected to contract by 7.2% this year, and according to Finance Minister Tito Mboweni, this is the largest contraction in almost 90 years. Therefore, the South African government finds itself in a restricted fiscal position.

Mboweni does not have much room to move within his emergency budget and therefore has called for a pragmatic approach, the reprioritisation of expenditure, and the implementation of austerity measures within the public sector.

Against the background of ongoing measures to address the pandemic in South Africa, Mboweni’s supplementary budget of 2020 stressed several key aspects.

The first issue addressed in the supplementary budget was the mounting debt-to-GDP
ratio, which is envisaged to reach 80.5% in this fiscal year, as compared to a projection of 65.6% in February.

Although Mboweni has confirmed strategies to curtail the debt and widening deficit, no sign of stabilisation was presented. The minister has also called for zero-based budgeting as one of the strategies in building a bridge to recover, and to close the mouth of the “hippopotamus”, which is eating our children’s inheritance. The zero-based budgeting is a big step in the right direction; it will make all roleplayers in the government understand the economic crisis we face.

The other positive part of the budget was the prioritisation of infrastructure development. The government has already considered almost 177 infrastructure projects that will assist in boosting the economy and curtailing unemployment.

The Sustainable Infrastructure Symposium, hosted by President Cyril Ramaphosa, announced 55 projects that are ready to be rolled out. The government needs to further stimulate its partnership with the private sector to ensure more infrastructure development and job creation.

Despite the envisaged revenue adjustment of R1.43-trillion to R1.12-trillion, the country is expected to continue spending. An additional R21-billion is allocated for COVID-19-related healthcare spending. The supplementary budget has also proposed a R12.6-billion allocation to frontline services.

An additional R11-billion is set aside towards improved water and sanitation, and an additional R6.1-billion for youth employment ensures that the most vulnerable are supported. However, the effectiveness of this allocation in the supplementary budget is dependent on the ability of our government apparatus to spend the money.

The only worrying issue that the minister did not dwell on much was the public sector wage bill, which still remains a challenge. Mboweni said half of the consolidated revenue will go towards the compensation of public service employees.

The compensation of employees continues to put much pressure on service delivery and pushing the government in the direction of borrowing.

What remains evident is that South Africa should continue opening the economy to revive sectors hit hard by the lockdown. Allowing trade to take place and markets to function will provide the ultimate boost to a struggling economy. A reduced role by the government could pave the way for the private sector to play a larger role in the economy. Moreover, structural reforms are required to create a favourable environment for growth and to restore South
African fiscal credibility.

  • Dr Keyser is head of department of economics and finance at the University of the Free State and Molefe is a lecturer in the department.

 

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