In his speech last night, President Cyril Ramaphosa went for a phased reopening of the post-lockdown economy and a big-spending approach to alleviate hardship.
There was another option. That would have been to go for more of a big-bang end to the lockdown, which would have meant a lot less support would be needed for the faltering economy.
We will be told tomorrow, when the president outlines the plan, what a phased reopening of the economy will mean. Given his stress on caution, it could be slow and only take place over months, at some considerable economic cost.
Much about our post-lockdown future must still be clarified. There were references to ‘structural reform’, ‘radical economic transformation’, and ‘a new social compact’ between business, labour and government, but no description of what these meant.
Under the new Ramaphosa plan, R500 billion will be spent on Covid-19 support. Some R130 billion will come from the reallocation of planned spending, but R270 billion, close to 14 percent of the planned spending on the existing budget, is extra.
Large-scale borrowing
How this will be funded will be revealed later in an adjustment budget. With little scope for extra taxes and large-scale borrowing, it does raise the prospect of the use of foreign exchange reserves and pension money to bridge the gap.
It appears as an all-encompassing package with more spending on healthcare to prepare for a surge in Covid-19 patients; extra temporary money for child grants; money for people not collecting Unemployment Insurance Fund (UIF) or another grant; money for municipalities for emergency water supply, public transport and sanitation, and also to provide food and shelter for the homeless; spending to protect and create jobs; income support for employees whose employers are unable to pay wages; and a 10% tax deduction for Solidarity Fund contributions.
Despite the support package, government might well face big problems if the post-lockdown plan is too restrictive and its lifting is too gradual.
Mass frustration is growing
The Ramaphoria that greeted the imposition of the lockdowns has rapidly faded. Mass frustration is growing; last week there were reports of violence and looting from eight of the nine provinces, according to City Press.
Government has not done well under the lockdown. A sudden roll-out of massive assistance was always going to be difficult.
The economic fallout has been massive. Economist Mike Schussler thinks unemployment might rise from 29 percent to 50 percent.
Since the imposition of the lockdown, the Reserve Bank has substantially revised downwards its forecast for growth this year, from -0.2 to lower than -6 percent. Lower growth means higher poverty and more lives lost.
A gradual easing of the lockdown will impose continuing economic damage and the need for higher spending. A looser regime of putting the population in masks and isolating the aged would mean less economic damage but does raise the risk of hospitals being overwhelmed.
Sweden allows all economic activity on the basis that in the end there will be no significant difference between the Covid-19 death rates in countries that lockdown and those that do not. Lockdowns flatten the curve, but sooner or later the virus spreads.
Cannot deal with sheer volume
The R500 billion spending package will have to be rolled out speedily if it is to work. Government has not done well in the roll-out so far.
The Labour Department has been unable to deal with the surge in claims for UIF payments.
Labour and Employment Minister Thulas Nxesi told TimesLive earlier this week: ‘The system was never meant to face such a huge demand. Now millions of workers are claiming. In terms of the system, we are not going to be able to deliver as we are supposed to deliver.’
So, the Department will be unable to pay the claims in a timely manner. How will the government now cope in rolling out a massive increase in grants, even if the SA Revenue Service helps?
Many municipalities in smaller towns are dysfunctional. How will they roll out the water supply, public transport and sanitation, and provide food and shelter?
Another sign of government not coping is this; City Press has reported allegations of corruption and food looting across the country. According to the paper, local councillors allegedly divert the aid to themselves and their supporters, and, in some instances, sell them on. Private charities and businesses seem to be doing a better job on this than government.
The gradual restart had best not leave too many decisions on what constitutes ‘essential services’ to the bureaucrats.
Extremely ham-fisted
The arrest of Impala Platinum’s chief executive officer Rustenburg Operations, Mark Munroe, for allegedly contravening lockdown regulations could turn out to be have been extremely ham-fisted. The company very probably took legal advice and should have evidence that it was not resuming full mining operations, but rather aimed at essential services to keep the mine going.
Restarting the economy should involve deep structural reforms that involve making minimum wages more flexible, halting bail-outs to state-owned enterprises, and an effort to restore overall business confidence by abandoning the radical economic transformation agenda.
We have still much to hear about the stimulus package, but there might be more in phase three.
The fast-emerging policy wonk cliché for the stimulus exercise is ‘using the entire public sector balance sheet’.
Big-government spending
That would involve raiding sources that are not intended for the purpose of supporting big-government spending. Foreign exchange reserves are there to be used in case the country faces a balance-of-payment crisis and is not earning sufficient foreign exchange for critical imports.
The Government Employees Pension Fund is not there to be used should the fiscus run low. And then there are the suggestions that private pension funds should also be raided to make up shortfalls. There are also suggestions that the private sector would be called upon to help out government. That might amount to what is a type of voluntary tax that the private sector needs to pay to stay on the right side of government.
A mammoth big-spend programme is ill-founded on the assumption that government can better contribute to growth than the private sector. One of the reasons for low growth in South Africa, according to the IMF, is that government spending has risen while private investment has contracted, thereby lowering productivity.
Besides, people would rather work than be reliant on handouts.
Rather than reform, it might be politically easier for government to go for a phased restart and big stimulus measures. A social safety net must be provided, but this cannot be sustained without reform and growth.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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