A Social Partnership To Boost Confidence, Restart The Economy And Conduct Urgent Reforms
(Extract from the Medium Term Budget Policy Statement)
The economic recovery plan was developed through extensive consultations between government, business, labour and civil society. It has two broad components.
A range of immediate and short-term measures will be taken to rebuild confidence, kick-start the economy and continue to mitigate the effects of the pandemic. And structural reforms will promote faster, more inclusive growth and employment over the medium to long term. Many of these reforms are drawn from government’s long-term structural reform agenda as outlined in the discussion paper that the National Treasury released in 2019 – Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa. Parliament approved the plan on 15 October 2020.
In the short term, the plan will focus on rolling out infrastructure, expanding energy generation capacity, creating mass public employment and supporting rapid industrialisation. At the same time, government will implement structural reforms such as modernising network industries, reducing barriers to entry, and increasing regional integration and trade. The National Treasury estimates that reforms in these areas can raise growth to over 3 percent over the next 10 years and create more than 1 million jobs.
The plan is accompanied by a detailed implementation schedule that will be overseen by a council chaired by the President. It will be supported by a leadership team that coordinates reporting and identifies areas where more effective partnerships are required.
Economic recovery plan effects on growth by 2030:
*Agriculture and industrial initiatives
**Reducing barriers to entry, easing the skills constraint and implementing tourism initiatives.
Source: National Treasury projections.
Operation Vulindlela: implementing structural reforms
Many of the proposed reforms in the economic recovery plan and their potential benefits have been detailed in recent editions of the Budget Review and Medium Term Budget Policy Statement. Yet implementation has been delayed by a lack of agreement over proposed reforms, a failure to prioritise and sequence reforms that have been agreed on, and lack of capacity in government. Operation Vulindlela will support the implementation of the economic recovery plan by accelerating priority structural reforms. It is based on similar “delivery unit” initiatives in countries such as the United Kingdom and Malaysia, as well as lessons learnt in South Africa. The initiative will be staffed by a full-time technical team that draws on additional expertise and capacity in the public and private sectors. The team will assist the economic cluster, Cabinet and the President to coordinate and accelerate the implementation of a limited number of priority reforms.
The Gains From Reform: The Case Of Brazil
(Extract from the Medium Term Budget Policy Statement)
Credible fiscal and economic reforms, the full effects of which may only be realised over the medium term, can reduce government borrowing costs and boost investor confidence in the short term, as recently demonstrated in Brazil.
Brazil and South Africa are often compared as developing-country peers. In both nations, GDP growth rates have declined over the past decade, partly due to weaker commodity prices and reduced business confidence, and government debt has risen rapidly. These fiscal challenges are reflected in elevated risk premiums – the higher returns governments must pay to compensate investors for perceived riskiness – and elevated bond yields.
South Africa and Brazil have tended to move closely together in both categories. Since late 2018, however, Brazil’s risk premium and the yield on its 10-year government bond have declined in comparison with South Africa. Although its debt has risen sharply, Brazil has made significant progress on a range of long-awaited and far-reaching reforms. This
included simplifying its tax system (one of the world’s most complex systems) and revisions to its pension framework. It is now estimated that Brazil’s debt will no longer balloon to over 140 percent of GDP over the next decade, but rise on a more moderate trajectory to about 100 percent of GDP by 2030. As investor confidence subsequently improved, lower borrowing costs created additional fiscal space beyond the direct economic effect of the reforms.
Developing economy risk premiums: Source: Bloomberg
Tax Revenue Performance In The Initial Stage Of The Pandemic
(Extract from the Medium Term Budget Policy Statement)
Tax revenues, which fell sharply during the first several months of the coronavirus pandemic, have begun to recover. However, monthly collections remain well below 2019/20 levels in many tax categories. For example, domestic value-added tax (VAT) collected in the first six months of 2020/21 was 6.7 percent lower than the same period in 2019/20.
Key factors affecting in-year revenue collection include:
- A significant decline in compensation, and therefore personal income tax, due to the lockdown
- A weaker import outlook, which has reduced VAT and customs expectations
- A sharp reduction in consumption, lowering domestic VAT collection
- Downward adjustments in specific excise duties associated with a longer-than-expected tobacco ban
- Stronger-than-expected corporate profitability, limiting the anticipated reduction in corporate income tax and dividend tax receipts
In April 2020, government introduced tax relief measures to provide temporary assistance to businesses and households during the lockdown. These interventions offered a combination of cash-flow relief through tax deferrals, and direct support through increased incentives to retain lower-income employees and reductions in payroll taxes. Details on the take-up and effects of these measures will be provided in the 2021 Budget Review.
Improved tax collection and administration continues to be an important element in achieving fiscal consolidation. The South African Revenue Service continues to rebuild its capacity following several years of mismanagement. Near-term objectives include:
- Finalising the tax gap study in December 2020 to quantify the difference between how much tax should be collected and how much is collected
- Remaining focused on international taxes, particularly aggressive tax planning using transfer pricing Increasing enforcement to eliminate syndicated fraud and tax crimes
- Continuing to use third-party data to find non-compliant taxpayers
- Collecting pay-as-you-earn and VAT debt, and ensuring that outstanding taxpayer returns are filed and liabilities paid
Update On The Public-Service Wage Bill
(Extract from the Medium Term Budget Policy Statement)
Government proposes growth in the public-service wage bill of 1.8 percent in the current year and average annual growth of 0.8 percent over the 2021 period.
To achieve these targets, which are essential for fiscal sustainability, government has not implemented the third year of the 2018 wage agreement.
Furthermore, the Budget Guidelines propose a wage freeze for the next three years to support fiscal consolidation. Additional options to be explored include harmonising the allowances and benefits available to public servants, reconsidering pay progression rules and reviewing occupation-specific dispensations. The next round of wage negotiations is due to start soon and work is under way to formulate government’s position. In addition, government is coordinating work relating to developing a comprehensive public-sector remuneration strategy for the medium to long term. This will include public office bearers, state-owned companies, public entities and local government. The strategy will seek to better balance competing interests on the basis of fairness, equity and affordability.
How much does public spending boost growth? Examining South Africa’s fiscal multiplier:
There has been considerable debate on South Africa’s fiscal strategy. Although there is some agreement that the debt-to-GDP ratio should stabilise over a reasonable time period, there are questions about how much support government can give to the economy in the short term and how much the state can borrow. The fiscal multiplier – a ratio that measures the extent to which national income changes in response to changes in government spending – is one tool for assessing the trade-offs involved in this debate. A multiplier of more than 1 implies that an additional rand of government spending can translate into more than one additional rand of GDP.
In general, a higher fiscal multiplier implies that more government spending will boost economic growth. Recent research in South Africa, concluded that spending multipliers are positive, albeit generally smaller than 1. The Reserve Bank estimates that the fiscal multiplier declined from 1.6 to less than zero between 2009 and 2019, as South Africa approached its fiscal limits. 2. In general, infrastructure investment multipliers tend to exceed consumption spending multipliers.
The literature shows large negative multipliers from revenue increases, suggesting that South Africa’s growth slowdown over the past five years may be related to rising taxes. The National Treasury’s view is that the potential growth rate is low, the country is reaching its fiscal limits, and the fiscal multiplier is low (or possibly negative). This implies that a large fiscal consolidation to narrow the budget deficit and stabilise debt – complemented by implementation of structural reforms – is more likely to support economic growth than continued spending funded by higher borrowing and taxation.
Sincerely,
