The time for talk is gone, Old Mutual Investment Group
With the Medium-term Budget Policy Statement (MTBPS) set to take place in about two weeks, the time for discussion is over as the urgent need for implementation of critical economic reforms can no longer be delayed.
This is according to Old Mutual Investment Group Chief Economist, Johann Els, who says that it is possible to lift economic growth to a higher growth path post the interruption caused by the COVID-19 pandemic; however, it will take absolute commitment to the fiscal consolidation targets announced at the June Supplementary Budget and there are zero allowances for slippage.
The June Supplementary Budget set out plans to combat the devastating impact of the Covid-19 crisis on South Africa’s already ailing economy, including policy reform, zero-based budgeting, expenditure cutbacks and wage bill savings. Assurances were made by Treasury that details on these plans would be announced at the MTBPS this month.
“We are undeniably facing our most crucial MTBPS in South Africa’s history, and while we have come to expect some level of slippage from the fiscal consolidation targets set in the past, there simply isn’t any room left for this in this year’s MTBPS,” warns Els.
The COVID-19 pandemic severely impacted the South African economy and as a result the fiscal situation; however, Els points out that SA’s economic woes did not start with COVID-19. “Our number one problem is a severe lack of growth, an issue that has persisted for the last several years,” he explains. Annual average GDP growth of only 0.8% per annum over the five years to 2019 has resulted in higher budget deficits and an ever-rising debt ratio.
“Efforts to contain government spending over the last few years are commendable, but these could not keep up with the impact of weak growth on tax revenues, the deficit and the debt ratio.”
As such, Els calls for structural policy change to enhance the growth trajectory over the next few years to be accelerated, but says that implementation is key. “The National Development Plan provides an excellent set of policies – these should be implemented without delay,” says Els.
He points out that we should ignore the pandemic-interrupted period of 2020 and 2021 and instead focus on the period from 2022. “Annual average growth could be lifted to a range of 1.5 to 2 percent from 2022 and there are a number of factors that should help lift confidence and growth in this direction. These include the current global economic growth uptick; the easing of SA Covid-19 infection rates and lockdowns; fiscal consolidation if the MTBPS continues along the lines of the June Supplementary Budget; progress concerning Eskom and its unbundling, opening up of energy markets, successful maintenance programmes and significant reduction of loadshedding by late 2021; and, lastly, headway made with regard to the fight against corruption, with some crucial victories starting to emerge.”
However, Els adds that there is an urgent need for immediate improvement on other policy measures that have been repeatedly mentioned by Government over the past two and a half years. “We need to see increased focus on infrastructure, specifically the modernisation of ports and railways, as well as licensing spectrum and the facilitation of regional trade,” he explains.
“We also need a reduction in the cost of doing business and red tape; improved access to development finance for SMMEs, market-friendly changes to SA’s investment regulations, which would go some way towards encouraging private funding of vital infrastructure development; support for agriculture, tourism and similar high job creation sectors; attracting skilled immigrants to reduce the skills shortage and revamping the skills framework and a range of basic education reforms to improve outcomes for workers.”
But, growth of around 1.5 to 2 percent, while better than the average of 0.8% p.a. over the five years to 2019, is not enough to achieve enough fiscal consolidation to stabilise the climbing debt ratio, warns Els.
“Avoiding a debt trap would be far easier if growth were to reach 2.5 percent and above,” he says. “For this to happen, we would need to see strong and sustained improvement in confidence amongst consumers, businesses and investors led by significantly improved trust in government and policymakers. Continued progress regarding the above-mentioned policy measures would go a long way towards putting us on a more solid recovery path,” he adds.
“Additional policy measures are also necessary, such as major transformation of SOEs, including privatisation to boost confidence; significantly improved infrastructure; strong private sector participation in all public-sector initiatives; strong commitment to the NDP – or equivalent – implementation; labour market deregulation and a sound social compact between government, labour and business.”
Els does not believe, as some economists do, that extra government spending is the way to stimulate growth. “This is categorically the wrong way to go about it,” he warns. “Policy change should focus on confidence and growth-enhancing measures, but urgent implementation remains the most crucial issue for us.”