Doing what is right for the depressed economy while hoping to regain a reputation for fiscal responsibility over the long run is no simple task. The adjustments made to the Budget last Wednesday (28th October) were made in these highly adverse circumstances. Tax revenues have collapsed along with incomes and output inevitably increasing the borrowing requirements of government- indeed more than doubling them as a per cent of GDP. The sacrifice of incomes in the lockdown however calls urgently for more government spending not less and lower, not higher tax rates.
Economic theory tells us that spending more on resources that will otherwise remain idle makes good sense. Extra income or benefits in kind provided by governments for households and firms brings more spending in its wake and results in more output, incomes and employment. The normal trade-off of schools for hospitals or cleaner air for more expensive electricity or spending less today to spend more tomorrow, does not apply when an economy operates well below potential and can be expected to continue to do so. More can be spent now so that more will be produced. The extra spending has no economic cost. It is the proverbial free lunch now being consumed generously, sensibly and widely across the globe in response to lockdowns.
We learned from the Minister that the SA economy is not expected to recover to 2019 levels until 2024-25. A much slower process of recovery than is expected elsewhere, for want presumably of enough stimulus, and a reason for spending more now. It will nevertheless take strict control over government spending, especially on the employment benefits provided for its own employees to regain a much better fiscal balance over time. And limiting such highly attractive employment benefits has to start now, as the Minister emphasized . Stabilizing the debt to GDP ratio to limit spending on interest should take a good deal longer. The very limited reactions in the Bond and currency markets to the revised Budget indicate that the jury is still very much out. Unproven is the interim judgment.
While the Treasury is constrained by want of reputation, the Reserve Bank is not so. It could be helping to hold down the costs of funding long dated government debt. And lending more freely to the banks so that they could fund much more, lower cost short term debt issued by the government. It should lower interest rates further and encourage the banks to lend more freely and make use of the loan guarantee scheme. Which is much the largest part of the Treasury’s stimulus package, regrettably still largely unused. Creating money as the cheapest form of funding government debt is as right now for SA as it is everywhere else. And the Reserve Bank has the anti-inflation credentials to be expected to reverse its monetary course when the time and the recovery calls for it.
Last Wednesday, a vital opportunity to enhance SA’s growth prospects and hence its ability to raise revenue and greatly relieve its Budget constraints was revealed outside Parliament. In the confirmation of a major energy resource in South African waters. Total and partners have speculated heavily on and in South Africa and have triumphed. Good for them and for all of us. The Intergrated Resource Plan (IRP 2019) sees very little scope for natural gas in SA as part of the energy mix. The plan predictably will have to be rewritten. And much better replaced by not another plan but a process well known to balance supply and demand. That is a market led process. One that would leave Total to develop its discovery as it sees best unencumbered by unhelpful regulation or crony capitalism or retrospective expropriation. The potentially favourable consequences of the right approach are hard to overestimate.
The construction of pipelines and urban gas grids and an infrastructure led growth beckon. Municipalities seeking electricity are likely partners as is Eskom. The people of SA will benefit from additional royalties, income and VAT and taxable income earning opportunities of all kinds. And from cheaper energy. The financial and structural constraints on our economy can be relieved. More immediately can be expected to be relieved with the right business friendly approach. Our fiscal and investment reputation depends upon it.