ROAD TO RECOVERY
SA’s economic progress crippled by slow implementation of reforms – OECD survey
Without a strong and sustained recovery, South Africa risks losing some of its hard-earned social progress in areas like education, housing, welfare and healthcare, according to the latest OECD Economic Survey of South Africa released this week.
The OECD survey says improving the tax system and reducing spending inefficiencies would help to put public finances on a more sustainable path, while taking action to revive productivity growth would help to revive GDP growth and raise living standards.
If needed, the tightening of monetary policy should continue to allow inflation – which disproportionately affects the poorest households – to return to the SA Reserve Bank’s target range of 3% to 6%. South Africa’s annual inflation rate accelerated to an over 13-year high of 7.8% in July from 7.4% in June, above market expectations of 7.7%.
OECD acting chief economist Álvaro Pereira says strengthening public finances, creating a more growth-friendly tax system and fostering higher productivity through enhanced infrastructure, education and competition, and more reliable power supply, will be key to get the recovery back on track and ensure higher living standards.
After a rebound of almost 5% in 2021, GDP growth is expected to slow to 1.8% in 2022 and 1.3% in 2023, and inflation is projected at 6.3% this year, with risks remaining from future Covid outbreaks and from the global repercussions of the war in Ukraine.
Productivity bleeds due to Eskom power cuts
Electricity shortages remain the most pressing bottleneck to economic activity, with firms hit by worsening power cuts following several years of deteriorating energy supply.
Proceeding with a planned split of state utility company Eskom into three distinct entities for generation, transmission and distribution, and easing regulatory barriers to firm entry, would enable other producers to enter the market, adding supply as well as bringing down prices, the survey says. However, minister in the presidency, Mondli Gungubele, this week told Cosatu and Saftu union members that “there is no plan in this government to sell Eskom. It does not exist; you’ll not find it in any document.”
According to PSG’s chief investment officer, Adriaan Pask, economists estimate that power cuts are costing the country over R700-million per stage, per day. “On a provincial basis, this translates into R75-million per stage, per day. Over the longer term, Eskom’s woes are underpinned by a lack of investment and maintenance,” he observes.
Accelerating the green transition by increasing the share of renewable energy would also support growth through investment and reducing electricity shortages.
The carbon tax introduced in 2019 is welcome in a country where coal remains the main energy source, but the level needs to be gradually increased and exemptions reduced, according to the OECD report.
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Less talk, more action
The report goes on to say that South Africa’s productivity growth is also held back by an insufficient provision of high-quality infrastructure – from roads and railways to telecommunications. Improving the effectiveness of public investment, in part through strengthening the selection process for large infrastructure projects, would be a step towards restoring productivity growth.
In October last year, the government unveiled a pipeline of 55 new infrastructure projects from various sectors valued at about R595-billion. It estimated this would create 538,500 employment opportunities.
Isabell Koske of the OECD says this is welcome, but more could be done.
“Improving skills in line with employer needs will also be key to revive GDP growth. While educational performance has improved in recent years, progress has slowed since 2015 and the supply of graduates remains limited.
“Education policy should focus on increasing the quality of primary and secondary schools and further developing vocational training and adult learning. Changing the financing formula of universities would reduce the cost per student and allow enrolling more students,” she says.
The OECD was critical of the country’s tax system, saying it could be made more progressive and efficient at raising the revenues needed to reduce the budget deficit and finance investments.
“For example, the allowances and deductions in personal income tax that tend to benefit high-income earners could be reduced while wealth transfer taxes and estate duties could be adapted to limit the transmission of wealth inequality.
“Once inflation has abated, there is room to raise the relatively low VAT rate, balancing that with increased transfers to low-income households.” BM/DM