THE Harvard Group of economists, who have been roped in to advise SA on economic policy, recently suggested that government should run a bigger budget surplus in order to help combat inflation.
This suggestion is interesting, more so given the swipes that Reserve Bank governor Tito Mboweni has been taking at Finance Minister Trevor Manuel and his cabinet colleagues.
The Harvard Group's thinking on fiscal policy isn't that far off Manuel's - they suggested a surplus of 1% - 2% of gross domestic product (GDP) against Manuel's budgeted 0.8%. But they also implicitly rapped him across the knuckles for giving personal income tax relief in the past when economic demand was overheating, saying that fiscal policy was too pro-cyclical. (A pro-cyclical policy is one that amplifies the business cycle instead of pulling against it to even it out.)
The link that the Harvard Group makes between fiscal policy and inflation is a controversial one. They are implying that government is spending too much, given the inflationary environment SA faces. Their argument boils down to the fact that the extra spending is fuelling domestic demand and inflation.
This argument is hard to swallow, given SA's massive developmental needs and the plight of the poor. Should Manuel then not give recipients of social grants inflation-linked increases because their spending is going to fuel inflation? How can this argument be countenanced in the face of the massive increases in food and transport prices?
Balancing act
The Harvard Group's stance on fiscal policy just doesn't make sense, given SA's developmental needs. But that doesn't mean that Manuel can't do more to help Mboweni combat inflation.
Ironically, he would have to sacrifice part or even all of his budget surplus to do so. And this is what Mboweni probably wants him to do.
The first point where Manuel could help Mboweni would be to scrap Manuel's levy on electricity, which will rake in R2bn this fiscal year. Rand Merchant Bank economist Ettienne le Roux estimates that this tax will take the increase in electricity prices to 40% if the National Electricity Regulator of SA (Nersa) announces a 30% increase in electricity tariffs on 18 June. The effect, says Le Roux, will be to take inflation to 12% or even more.
In light of the new developments - Eskom's request for a 60% increase in electricity tariffs this year followed by a further 40% next year - Manuel's electricity tax simply must be scrapped.
From Manuel's perspective, the tax helps him to finance the financial aid that government promised Eskom (R60bn over five years). That money is supposed to be a loan, not a grant, but Manuel has accounted for it above the line - that is, as though it is a grant.
The money is supposed to come out of government's contingency reserve, which is only R6bn for this current fiscal year. That amount isn't enough to avert a huge increase in electricity tariffs this year - as we have seen. The question is just by how much electricity tariffs will rise.
Mboweni implicitly pleaded for more government aid for Eskom when he recently said government couldn't at the same time support inflation targeting and a huge hike in tariffs for Eskom.
I think that, given the timing of Eskom's hike - amidst an oil and food price shock - that government should do as much as it can to ameliorate the effects of an electricity price increase. If that means using the budget surplus, then so be it. There's no shame in running a Budget deficit, especially if a country has huge developmental needs.
Fuel levy
There are ways other than electricity that Manuel can help Mboweni. For instance, Manuel announced in his Budget an 11c increase in the fuel levy (of which 5c goes to the Road Accident Fund). A better idea would have been to announce no increase in the fuel levy, and to pump some government funds into to Road Accident Fund. If that means a smaller surplus or even a deficit - again, no need for tears.
A thought that occurs to me - although it's highly unlikely to occur to Manuel - is that Manuel could even have reduced the fuel levy, thus actively helping Mboweni to bring down inflation. But this would be a difficult decision for the Finance Minister, as the fuel levy is a highly efficient tax.
Another area, of course, where the Budget adds to inflation is with sin taxes. Do the annual hikes in the prices of beer, cigarettes and other vices really reduce their consumption, or simply swell Manuel's surplus?
Manuel, by putting up certain levies and taxes and being reluctant to help Eskom, has added to inflationary pressures in the economy at a time when SA can least afford it. Mboweni is right to take the odd swipe at him and his cabinet colleagues, like Alec Erwin.
- Fin24.com