Opinionista Neil Coleman 7 July 2020

Supplementary Budget puts South Africa on the edge

Tito Mboweni’s austerity Budget betrays the President’s R500bn rescue package — we need to pull back from the precipice.

A group of 122 economists and policy experts, called the Economists Initiative, and the Budget Justice Coalition (a coalition of important civil society formations) made submissions to Parliament last week in response to the Supplementary Covid-19 Budget tabled by Tito Mboweni on 24 June.

The Economists Initiative took the extraordinary step of calling for Parliament to reject the Budget and send it back for reformulation. The BJC comprehensively critiqued the Budget, and suggested that it was so regressive that it was probably unconstitutional. In their oral submission, the Economists Initiative suggested the Budget was tantamount to committing “economic suicide”.

The emergency Budget had been tabled ostensibly to give effect to the R500-billion package announced by the president on 21 April. The package had been widely welcomed as an important start to assist businesses, households and workers, although certain shortcomings had also been identified by the IEJ and others.

The Economists Initiative, BJC, and other submissions laid out how the Budget departed from the R500-billion package and strenuously opposed the brutal austerity package to be introduced over the next two to three years, involving cuts of more than R400-billion. The Institute for Economic Justice (IEJ) explained in clear detail how the Budget, which was supposed to take forward the R500-billion package, failed to implement the commitments contained in it. The most blatant example of this was that instead of implementing the R100-billion jobs package, the Budget contained a mere 6% of this promise. But the Budget fell short in virtually every respect: National Treasury had torn the guts out of the promised package.

In response to these criticisms, Director-General of Treasury Dondo Mogajane and his team made a number of startling claims: he told the committee not to be “deceived and misled” by the submissions, or be used as a “platform for false, misleading statements”; attacked the BJC and Economists Initiative inputs as being “politically motivated” and aimed at attacking Mboweni; said the submissions were empirically false and misleading”; that the BJC and Economists Initiative had falsely claimed that the president had committed to R500-billion in new spending; and that this was “the most expansionary Budget in years”, “massively counter-cyclical” and so on.

These were all blatantly inaccurate or provocative statements. It is unfortunate that such an important institution as Treasury appears to live in a parallel universe.

The statements of the DG were so offensive that the Chair of the Committee, Yunus Carrim, hauled him over the coals for wanting to dictate to Parliament how it should respond to civil society inputs. Carrim said this was outrageous and insulting. Interestingly, he observed that the DG is normally a mild-mannered man, creating the impression that he was instructed to make this attack by his political principal.

It is disingenuous for Treasury to claim to Parliament and the country that they have not embarked on an austerity path and that they are actually embarking on large countercyclical spending in response to the crisis. This is frankly bizarre when:

  • Estimates from economists are that projected Budget cutbacks over the next couple of years will range from R400-billion, according to business economist Nazmeera Moola to as much as R600-billion, according to Duma Gqubule.
  • The amount of new spending contained in the Budget is only R36-billion which is less than 1% of GDP as compared to the Presidents R500-billion (“10% package”), with around R100-billion promised new spending. It is true that the original rescue package envisaged a reprioritisation of some of the spending, something clearly acknowledged in the Economists Initiative and BJC submissions. However, since April even the limited amounts which had been allocated as extra stimulus have been whittled down to a fraction of what was originally proposed, and less than half of the package has materialised.

It is likely that we are looking at Budget cuts of as much as 10% of GDP, which is more than 10 times the size of new spending allocated to the rescue package. Cuts of this magnitude defeat the purpose of an emergency response. Intellidex has estimated that the likely drop in GDP in 2020, if the R500-billion rescue package were fully implemented, would have been 10%. However, they say without the rescue package being properly implemented the drop in GDP could be more than 16%. This is totally plausible.

Is the Finance Minister, or National Treasury, prepared to publicly debate these issues with civil society representatives, on a live platform of their choice, mediated by experts, so that the South African public can judge for themselves as to who is telling the truth on these matters?

There is little doubt in our minds that by embarking on this brutal programme of cutting back on resources available for delivery of basic rights to the population, the government is in violation of its constitutional obligations to progressively realise the socio-economic rights, which are outlined in the Constitution. Various statements make it clear that Treasury and government have not ensured the maximum use of available resources to protect the socio-economic rights of a population being brutalised by the effects of the Covid pandemic. There is a strong view therefore in civil society that the constitutionality of this Budget needs to be tested in court.

Debates over whether Treasury has indeed embarked on a massive austerity programme and whether the Budget fails to take forward the rescue package should consider the following questions:

  1. Has there been real per capita cuts in expenditure over the past five to six years or have we seen growth? The claim by Treasury that South Africa has embarked on an expansionary fiscal stance for more than a decade is blatantly false. The so-called reprioritisation of R130-billion through cuts to other budgets, are over and above the many cuts that we have experienced over the past five to six years (their own budget reviews and the details of the minister’s speeches will bear this out). Therefore what has been taken from budgets to allocate to the rescue package amounts to robbing Pamela to pay Paul, and has very negative impacts on important areas of government spending which people rely on in relation to key services as well as infrastructure.
  2. Did the Budget constitute a significant stimulus package or a rescue package? If our GDP is estimated to contract by at least around 10% this year, as predicted by many economists, then the required magnitude of a response would be in the order of 10% of GDP. But the Budget provides a net increase in spending of less than 1% of GDP, or R36-billion.
  3. Is it not correct to say that the R500-billion package has largely been implemented and that it is only the detail of reprioritisation which has changed the intended allocations outlined by the president in April? There are massive discrepancies between the April package and the June Budget which cannot be ascribed to technical issues of budgetary reprioritisation. For example, Treasury allocated R6-billion for the jobs programme. Yet the original commitment in the emergency rescue package was R100-billion for jobs.
  4. Doesn’t a rising budget deficit reflect the fact that the Budget is expansionary, as claimed by Treasury? The rise in the budget deficit is largely a result of the collapse in taxation which has been caused by the lockdown of the economy, and the economic impact of the Covid-19 crisis. The huge spending cutbacks and failure of the state to inject stimulus into the economy can only lead to further contraction, business closures, household reduction in income and therefore further contraction in the tax revenue which the state receives. So the rise in the budget deficit and debt is completely consistent with the fact that the state is massively cutting back its expenditure.
  5. Have we not followed international best practice? The Budget cutbacks and implementation of austerity are inconsistent with what has been done elsewhere in the world where governments have taken the view that they need to “throw the kitchen sink” by making massive public investments to rescue their economies, and finance repayment through growth and recovery. We have seen governments embarking on unprecedented expenditure programmes which have both raised deficits and debt levels equivalent to at least what we are seeing in South Africa or even higher, as well as the adoption of unconventional methods such as central bank purchasing of bonds as well as quantitative easing and financing of governments.
  6. Is this not purely an ideological debate about different approaches to economics? There is a difference in paradigms, but also a difference in interests and priorities, with Treasury continuing to focus disproportionately on the financial markets. The simple reality is that in this massive economic crisis, failure to provide assistance to households, workers and businesses means that the damage that is done is fundamental and long-lasting (economists call this hysteresis), and will prevent us from emerging out of a downward recessionary spiral. This is precisely why it is called an emergency rescue package. The approach taken globally is that everything that is possible must be done and that the economic fallout in terms of debt, deficits and so on will be dealt with later. The cost of doing nothing or too little is far higher than the costs incurred by temporarily rising debt and deficits. Being paralysed by caution will lead to massive economic destruction both of productive capacity as well as effective demand in the economy, which will be impossible to recover from over the medium term.
  7. But are we not heading for a sovereign debt crisis? The creation of national hysteria around the issue of debt and the misleading claim by the Minister that we are heading for a “sovereign debt crisis” completely misdirects the public to suggest that debt is our main challenge. This obscures the reality that the main challenge we’re facing is one of economic depression, rapidly rising unemployment which is on track to reach 50%, and widespread poverty and hunger among the population. The levels of debt in South Africa are not particularly high by emerging market or developing countries’ standards. Indeed, we are fortunate that the vast majority of our debt is owed in rand — not in foreign currency, unlike a number of other countries — and that we have deep reserves of domestic resources which can be tapped in a range of different ways. The rise in debt levels is not very different from those being experienced both in developed countries and other middle-income countries. Debt is a ratio, so the levels of debt will increase at a more rapid rate if our GDP continues to decline. That is the only possible result of a massive austerity programme.
  8. Are we not forced to turn to international lenders to bail us out? It is misleading the country to suggest that the only route government has to finance the expenditure and the shortfalls arising from the economic crisis is to borrow on international markets or from financial institutions internationally. Many economists have outlined a range of routes for mobilisation of domestic resources which are plentiful and deep in South African markets and can be harnessed at a much lower cost and with fewer risks. But it seems Treasury is keen to use the route of international loans as a device to lock us into a structural adjustment programme.

There is a real, and probably justified, fear that the Treasury and hawks in the economic establishment are trying to use the crisis to justify the imposition of austerity and harsh structural adjustment measures which is similar to what has been done historically in various countries in times of crisis — what Naomi Klein calls the Shock Doctrine — which is to use the crisis as a cover to impose right-wing doctrinaire measures on the public under the cover of claiming to represent a solution to the crisis. This strategy has ended in tears globally.

On the details of the different elements of the rescue package, there is insufficient information, a lot of smoke and mirrors, and speculation. However, the evidence that we have does not look at all encouraging. Calculations by the IEJ and other academics and experts reveal that the wage support scheme at best will reach 50% of the workers who have been affected by non-payment of wages over this period. The Department of Social Development calculates that the food nutrition and food parcel programme by the end of May reached only about 12% of those who need the food, and we are suffering from food stress. The credit guarantee scheme has only reached a small fraction of businesses who need support as less than 10% of the promised amount has materialised. The special Covid-19 grant has reached at best 15% to 20% of its intended beneficiaries — this underscores the urgent need for the introduction of a universal income grant.

Many raise the issue of weak state capacity, and this is a legitimate concern which needs to be addressed. But the challenges of state capacity also need to be considered in the way in which programmes are designed and delivered, ensuring the simplest way to get support to households and businesses. The classic example is the adoption of a highly restrictive Covid-19 grant, which is exclusionary and complex to administer. A universal grant, on the other hand, gets grants directly to the intended beneficiaries and deals with targeting via the tax system. This is the type of bold thinking needed now.

Finally, while the economy has been opened up, it has not been done in a properly managed way. So it is very likely that we will see a massive second wave of infections making a second rescue package necessary. Given the posture taken by the government and Treasury, it is highly unlikely that they will be prepared to embark on such a rescue package.

A number of other countries have embarked on second and third waves of rescue packages as the need has arisen. Therefore, Treasury’s regressive stance is extremely worrying, both in the immediate term given the desperate assistance required by businesses, households, and individuals, and in the medium term, as the depression this profoundly mistaken strategy will create, will be so deep that there will be little prospect of building the new economy which the president speaks of.

We truly are on the edge of a precipice, which must be averted at all costs. DM

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