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- Finance Minister Tito Mboweni is facing rising expenditure needs and plummeting tax revenue.
- In short, everything which could go wrong, has.
- But trying to solve fiscal problems with monetary policy is like pouring water into a bucket full of holes.
It is quite difficult to put oneself in the shoes of Finance Minister Tito Mboweni and his dedicated Treasury team. To use the analogy which he posted on Twitter, he has to close a budget deficit as wide as the hippo's mouth. The analogy of a hippopotamus' mouth extends beyond its staggering size to the strength of the top and bottom jaws that one should imagine trying to squeeze closed.
Unfortunately, in this case, the top jaw represents the rising expenditure needs, which includes social and economic infrastructure, salaries and wages, and now, the Covid-19-related spending. The bottom jaw, which is downward spending, is the tax revenue, plummeting due to the Covid-19 impact on the economy.
Closing this hippopotamus' mouth of a fiscal deficit is difficult and comes with risks. The failure to close it is even riskier; it means the hippo stands ready to crush any ambition we may have in reviving economic growth, into its belly, which may be the International Monetary Fund's structural adjustment programme in a couple of years.
Let's sketch the enormity of what Treasury faces. The worst contraction in real economic growth in a century, even surpassing that during the Great Depression, any war periods and the Great Recession contractions. Consequently, a collapse in all major tax revenue sources – corporate income tax (CIT), personal income taxes (PIT), value-added taxes (VAT) and trade taxes – estimated by the South African Revenue Service to be in the region of R285 billion. As far as revenues are concerned, everything that could go wrong went wrong, and there is little Treasury can do about it.
The forced closure of non-essential business, necessary to flatten the coronavirus curve, has resulted in poor profitability of companies that will reduce CIT. Weighed down by sticky overheads while experiencing little-to-no cash inflows, the first casualty was workers. They saw their salaries cut and some were outright retrenched. First, this reduces PIT.
Second, with lower incomes, consumers spend less and thus VAT collections also reduce. Externally, all major economies that are typical destinations for SA's exports are also experiencing similar economic crises, which means they are buying less of our exports. Here at home, we are also importing less due to lower demand. Combined, trade taxes have also reduced.
Combined, the impact of lower tax revenues and the increased spending requirements will translate to a budget deficit of anywhere between 12%-16% of GDP and the debt to GDP ratio that approaches 85% in the current fiscal year. At current growth forecasts, the debt to GDP ratio approaches 100% in 2024 in the absence of economic reforms.
It is a daunting task that Treasury faces, and all of the government must realise that the hippopotamus' jaws are wide open and a failure to act will send South Africa into the belly of the International Monetary Fund's structural adjustment programme. Some, such as Cosatu, have called on the South African Reserve Bank (SARB) to start the printing press and finance government directly, to the tune of a R1 trillion stimulus. Others have called for a R10 billion to R20 billion bond-buying programme per week, which puts it at a R520 billion to more than R1 trillion stimulus per year.
These figures were quoted by SARB governor Lesetja Kganyago during his virtual public lecture at the Wits School of Governance last week. To paraphrase him, during the current fiscal problems, there is somehow a belief that these problems can be fixed by monetary policy through printing money and handing it over to Treasury without costs. There is also a rebuttal, by some, to his point that the central bank can be bankrupt and itself require saving by the government. It's very perplexing that some of these radical proposals, as they call them, are from very experienced people who once worked at the Treasury. During their time there, amid the so-called jobless growth, and declining public infrastructure spending, they never advanced these unconventional and "radical proposals". Interesting how times have changed.
Monetary policy for fiscal problems
Here is a permanent assumption that we all need to work with. There are no monetary policy solutions to fiscal problems. We simply can' t expect a bucket which has big holes underneath it to hold water sustainably by pouring more water in it. Just like the physics won't work on this, the economics doesn't work on trying to use monetary policy tools to solve fiscal policy problems.
When all is said and done, the fiscus is unsustainable. It was unsustainable before Covid-19. The Treasury knows this and they have been saying it as much. We and most economists have said it. Yes, there is a need for unconventional policy response across the spectrum. However, so far, unconventional is synonymous with monetary and never fiscal. To date, monetary policy has adjusted in ways we haven't seen in many years. What have we seen on a fiscal side? Same old, including proposals to bail out SAA yet again.
The hard choices are not being made to completely stop fruitless spending and spending that does not improve the productivity of the economy. At least the finance minister has proposed a zero-budgeting framework, but there are those who say this is austerity in a sheep's skin and continue to call for more funds to be made available, with little detail on how these funds will be used in a manner that will increase productivity.
Yes, this adjustment budget is an emergence one and will unlikely deal with the sustainability of the fiscus. It may offer proposals for sustainability but they will remain as such as long as the other government departments either fail to follow through because of a lack of capacity of because they simply do not comprehend that the hippopotamus' jaws are open to crush SA's economy into the belly of the IMF's structural adjustment programme. Those prospects appeared remote a year ago but they now increasingly look closer and will depend on making hard choices. In every company operating properly, a CEO (or leadership collective in the case of the governing party) who ignores the warning of the chief financial officer (read finance minister) and treasurer (you could read this to be the SARB governor) eventually bankrupts the company.
Isaah Mhlanga is chief economist of Alexander Forbes. Views expressed are his own.
