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What Ramaphosa's stimulus package should look like

Sep 21 2018 09:25
Jannie Rossouw

The announcement that South Africa is in the grip of a technical recession with two consecutive quarters of negative economic growth recorded in 2018 has raised expectations about a stimulus package to be announced by government on Friday morning.

The debate about the definition and measurement of a recession in South Africa is of little general importance, as the country has been suffering a long period of extreme unemployment. The country’s unemployment rate has been in excess of 25% for years.

Depression and recession

Unemployment at a rate above 25% raises the question whether South Africa has been in the grip of an economic depression for many years. Unemployment at such levels is associated with a depression, rather than a recession.

The current recession is the consequence of bad policy choices, corruption and state capture under the leadership of Jacob Zuma. Recessions are caused by low levels of business investment, which is an understandable response to corruption and maladministration.

The long-term solution to the recessionary conditions is therefore the restoration of business confidence through the eradication of corruption, the prosecution of state capture and the introduction of policy certainty.

Business investment is the only sustainable way in which a country can achieve sustained economic growth and maintain its growth momentum.

In the absence of business investment and any government plans to restore such investment, the South African government has decided to announce an economic stimulus package. 

The aim of this package is presumably to lift economic growth to a higher level and to eradicate unemployment. Naturally, the reasonable expectation is that such a package should also address the impediments on investment highlighted above.

Demand and supply

An economy can be stimulated either from the demand side or from the supply side. In both instances, the intention is to increase the level of the country’s gross domestic product (GDP). 

Demand side stimulation takes the form of increased government expenditure, thus raising the level of GDP.

Supply side stimulation focuses on the removal of limitations or impediments on supply, thus increasing the level of economic activity and GDP.

The best-known example of supply side stimulation in South Africa was a reduction in the maximum marginal tax rate from 72%, the prevailing level in the early 1970s. This reduction in taxation increased to supply of skilled and professional labour, as the lower tax rate made it more attractive for high income earners to work longer hours.

In the current circumstances, the government can introduce a stimulus package that focuses on supply side initiatives to stimulate business enterprises. Measures that will come at little or no cost to the government, including the timely payment of the invoices of small businesses supplying goods and services to the government and the timely repayment of VAT refunds.

It is more likely that the government’s package will focus on the demand side. Such a package will increase government expenditure and must therefore be accompanied by a clear explanation of the way in which the money to be used for this purpose will be sourced.

Increased expenditure should focus on the maintenance and improvement of the infrastructure and not on government consumption expenditure. It will, for instance, be beneficial if the government announces an initiative to fix all malfunctioning water treatment plans.

Other initiatives that can stimulate the economy or rid the taxpayer of unnecessary burdens are a reduction in the size of the Cabinet and in the number of deputy ministers, and the closure of non-performing state-owned enterprises such as SA Airways.

Another initiative that will have a beneficial impact at various levels is the announcement of a policy that the government will in future only purchase vehicles manufactured in South Africa for the government’s vehicle fleet. This will stimulate domestic output, thus increasing the GDP, and increase domestic employment.

Tough choices

In the quest to stimulate economic activity in South Africa, the government faces hard choices. There are no easy options, as the country already faces a fiscal cliff. The danger of a fiscal cliff is the result of runaway growth in civil service remuneration expenditure, sharp increases in the interest payment on government debt and a large payments in the form of social grants.

An additional fear is that the government will turn to China to borrow funds for a fiscal stimulus package. Such borrowing comes with conditions and borrowed capital must be repaid. If this is the route the government elects to follow, a minimum requirement is that the conditions should be published. China is busy with an expansion drive in Africa and South Africa should not became its next victim.

The government should also not be permitted to use funds in the Government Employees Pension Fund for a stimulus package. Fund members should be vigilant in guarding their best interests.

Professor Jannie Rossouw is the head of Wits University's School of Economic and Business Sciences.

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ramaphosa  |  jannie rossouw  |  cyril  |  recession  |  sa economy
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