Can this time be different for SA?
Hold off on new taxes, cut state spend and stop the SOE decay - add that to Ramaphosa’s recovery plan, and SA has a chance.
By James Formby, RMB CEO
Last week President Ramaphosa unveiled to parliament the third and final instalment of the government’s response to the devastation caused by Covid-19. First there was the immediate health response. Then came the social and economic relief package. Now lies ahead the hard work of reconstructing the economy.
On the surface at least, the economic recovery plan looked similar to what we have heard before. Commentators have been wondering if it is fated to again promise much yet deliver little.
But there is real hope that this plan may actually succeed where others have failed.
This is especially true if the Finance Minister can hold the course and not introduce an avalanche of new and increased taxes in the Medium Term Budget Policy Statement (MTBPS) on Wednesday next week.
Why are we hopeful the recovery plan may be more successful in spurring growth this time?
The first critical point is that this plan has been built by consensus. The recent hard Nedlac debates with stakeholders from different ideologies representing government, labour, business and civil society, will hopefully ensure that there is accountability from across South Africa for these stakeholders to play their part. And hopefully support not only those parts they initiated, but the plan in its totality.
The second point is that there is clearly more urgency. The economic pain inflicted by Covid-19 is tangible. The recession the country is in is of an order of magnitude never seen before. We all know that the government is now playing deep into extra time with an urgent need for some late goals. We can only hope that implementation demonstrates this urgency.
Thirdly, this plan has the clear support of the President. We no longer have plans proposed by National Treasury, with criticism thrown from others. With presidential support, we should also have more effective oversight of delivery.
Fourthly, while much of the content was not new, it offered greater credibility and was more focused. Previous plans have had many priorities, many of which were vague or expressed broadly. This plan contains only five high impact ones s: infrastructure, energy, jobs, manufacturing and rooting out corruption. This improved focus will increase the chances of execution. This focus even goes to the extent of narrowing down the infrastructure projects government sees as a priority and attaching timelines to them. This is helpful as it ensures collective emphasis on getting these across the line.
It is particularly encouraging to see the renewed importance put on renewable energy and energy security. Energy security has been a major drag on the economy and South Africa has an opportunity to embrace the energy transition even more aggressively given that much of our coal fired fleet is reaching its end of life.
While the plan’s ambitions are encouraging, next week’s MTBPS will be an early test of whether it can credibly translate into the numbers and help lift foreign as well as domestic investor sentiment.
Finance Minister Mboweni clearly needs a lot more money but this time he must resist the knee jerk response of simply raising and creating new taxes to make up for revenue shortfalls wrought by the recession. A strategy of adding to individuals’ and companies’ tax burden simply won’t work now. It may even have the opposite effect of reducing revenue (at the worst possible time) as higher taxes are resisted.
For a real chance of the plan’s success there are only a few measures government must take, historically difficult as they may be.
Government has to address state spending and particularly its wage bill which has taken on a life of its own. Equally, if the government fails to stabilise its debt load, which is fast approaching 90% of GDP (last year it was only 63%) , South Africa faces the real prospect of a debt crisis in the next few years. This will have severe and broad knock-on consequences for every part of society. Rating agencies have already repeatedly raised the red flag.
We need to see a commitment to ending the drain of State Owned Enterprises (SOEs) on the fiscus through continued bailouts. Encouragingly, there are signs government may consider equity partners to ease the SOE funding burden.
This article appeared in the Financial Mail on 22 October 2020
While the recovery plan does have many promising elements, it needs to be put into action quickly. There is no better proof that this time things really are different than where pubic money is being spent.