SA can and must mobilise substantial economic stimulus using the entire government balance sheet, advisers and officials in the presidency heard on Thursday.
While the world is mobilising enormous fiscal and monetary resources to combat the effect of the global economic "sudden stop" brought about by the Covid-19 pandemic, the Treasury has been slow to respond amid arguments that the country
has no fiscal space to manoeuvre and cannot afford a stimulus package.
A crucial cabinet meeting on Wednesday to discuss the country’s response to the economic and health crises ended inconclusively without any decision taken. On Thursday, the presidency hosted a discussion with selected economists, development strategists, public finance specialists and analysts on responses to the crisis.
Making the case for fiscal stimulus, former head of the Treasury budget office and now an adjunct professor at Wits University, Michael Sachs, argued that while SA will be likely to face the prospect of "debt distress" in the medium term and is without a plan to finance the budget deficit, "there are certain imperatives we have to meet". To do this would involve mobilising the entire public sector balance sheet including the Treasury, the Reserve Bank, the Unemployment Insurance Fund (UIF) and the Government Employees Pension Fund.
If thought of in these terms, "our fiscal space is not as limited as we might think", Sachs said.
There is also little hope of raising all the funds required on domestic markets and resources will have to be mobilised internationally.
The elements of a fiscal response should include: an unlimited additional allocation to health; a R500 a month top-up of all social grants for six months at a cost of R9bn a month; wage support of R100bn through the reserves of the UIF over the next 12 months; and a R200bn credit guarantee system to backstop new credit lines for firms.
The scheme would be operated by the Bank and guaranteed by the Treasury and would appear as a contingent liability on the sovereign balance sheet.
To fund this Sachs argued for a far-reaching budget reallocation of capital grants, such as for housing, municipal and provincial infrastructure, postponement of capital projects until 2021; drawing down on surpluses across government, including the UIF and government sterilisation funds; and a consideration of contribution holidays to the Government Employees Pension Fund and Government Employees Medical Scheme. A "Solidarity" levy is suggested as a way to target the most affluent, who will remain cash flush through the crisis, as well as a Solidarity government bond to raise funding for the Covid-19 response.
But because SA faces, in the medium term, the prospect of an inability to finance government borrowing through the bond market at sustainable rates, the Reserve Bank — which remains the country’s most credible institution — will need to play a larger role in giving confidence to the market. Once past the response period, the Treasury would need to follow up with a credible fiscal stabilisation plan, Sachs said.
Intellidex chair Stuart Theobald presented to the meeting on the design of the credit guarantee scheme, managed by the Bank, which would provide liquidity at rates below the repo rate. The scheme aims to support businesses, which previously had been viable, but have been hit by substantially diminished cash flows because of the Covid-19 lockdown. It would also have the effect of protecting GDP from permanent shrinkage by preventing business failures and liquidations that would otherwise emerge.
"They require urgent funding to bridge them to the other side of the crisis. Failure to support them will lead to widespread business liquidations and staff layoffs, and trigger wider distress in their supply chains. This will cause a permanent loss in output that will make the post Covid-19 recovery slower with long-term reduced potential GDP," Theobald said.
Development strategist Kate Philip illustrated how the topping up of the child support grant would effectively target the most vulnerable households.
The cabinet said on Wednesday that it is to hold a second meeting on Monday to deliberate on the input from all government clusters.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.