02 MAR 2021
SA must avoid low growth trap without falling into debt trap
In challenging economic circumstances, Finance Minister Tito Mboweni had a difficult balance to achieve. The Budget Speech had elements of both hope and despair. The slightly better economic and fiscal news, together with the vaccine rollout in the months ahead, were welcome. The National Treasury’s short-term funding arrangements were positive. Yet the improved immediate economic outlook is what SA must now urgently build on to move its economy and public finances into more sustainable territory in the period ahead.
Bearing in mind that the economy was already in a recession when the pandemic hit SA nearly a year ago, there is much economic ground to recover. While as the Budget rightly emphasised that there will be an economic ‘rebound’ this year, the drivers of SA’s growth prospects beyond 2021 are much more important. The economy is not yet out of the woods until total fixed capital formation, underpinned by investor confidence, starts to accelerate from its current weak levels. Much of the expected economic rebound is predicated off a very low base. Unemployment is now at record levels. Stronger immediate domestic economic trends therefore now need to be translated into sustainable job-rich investment and growth over the medium-term.
Already last year it was widely agreed that SA had to plan and act beyond the pandemic, including grappling with the ongoing structural deficiencies in energy security, costly skills shortages and persistent policy uncertainties. The modest Budget growth forecasts beyond 2021 therefore need to be bolstered by the extent to which growth plans and other structural reforms are seen to be actively implemented to put the economy on a higher growth path. Strict but realistic timelines for policies and projects thus need to be constantly and visibly enforced to achieve more tangible outcomes. And the latest Budget continues to emphasise the serious long term risks that remain in the fiscal outlook.
Finance Minister Mboweni reiterated in his Budget Speech that SA’s public finances remained ‘dangerously over-stretched’. He emphasised that SA still had to ‘shore up its fiscal position’. Hence although National Treasury has generally acquitted itself well over the past year in balancing the needs of the country in unprecedented conditions, there are no grounds for complacency. For unless at a minimum the growth and fiscal targets outlined in the 2021/22 Budget are successfully reached, SA may yet still face its financial Dunkirk later. The challenge remains to steadily and consistently implement policies and projects which will get SA out of its ‘low growth trap’ without falling into a ‘debt trap’.
Higher growth in itself will not solve all SA’s economic problems. Rather it would create a more buoyant climate for managing them. The National Treasury and the country must therefore continue to implement an agenda of tough decisions and trade-offs which will avert a ‘worse-case scenario’ debt outcome later. Achieving lower State spending without damaging economic growth still requires that the size of the public sector wage bill must be effectively addressed and public sector productivity enhanced. Bailouts to large state-owned enterprises need curtailment. Although general taxes have understandably not been raised on a weak economy, it emphasises again the extent to which future tax revenues will depend on renewed growth. The latest tax shortfall is the highest on record.
In the period ahead, the credibility factor in economic and fiscal policy therefore still assumes great importance because of the previous poor track record of often not meeting relevant targets. Confidence now depends on visible traction emerging in structural economic reforms. Some near-term significant ‘wins’ would help to build confidence. And while government has indeed announced some useful reform measures, not only should these be better communicated but they should also not be neutralised by other steps that are inconsistent with the intended overall economic direction.
The need to ‘stay on message’ for the long haul is thus essential. This again emphasises that the required coherence and implementation of policy and projects are a collective Cabinet responsibility, in collaboration with the private sector where appropriate. Ensuring policy coherence cannot rest on the shoulders of the National Treasury alone, if SA is to successfully turn its economy around sooner rather than later.
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