COLIN COLEMAN: Three-pronged strategy will help SA to bounce back
Besides rooting out security threats, the government needs to single-mindedly drive pro-growth reform and economic stimulus
To bounce back from recent traumatic events, the Ramaphosa administration would do well to consider the following three-pronged strategy:
- A decisive assault on all threats to our national security and constitution.
- The rollout of an economic stimulus targeting the unemployed and small businesses in urgent need of support.
- Accelerated implementation of an uncompromising programme of pro-growth structural reforms.
The ghastly pictures beamed worldwide have cast a large shadow over the country as an investment destination. We now need to persuade people that SA is safe for investors, companies making long-term bets and skilled people. This should begin with the timely arrest and prosecution of insurrectionists, rooting out enablers within the state and ANC, and overhauling the leadership of the security establishment.
Action by the security forces, while respecting human rights, must be visible to quell all threats and win back trust. Confidence must be restored that families are safe in their homes, communities are protected and properties are secure. South Africans watching the shocking violence would have realised that most looters were poor and hungry and acting out of desperation, even if manipulated by conspirators.
The economic cost of the unrest is estimated at R50bn, a wake-up call to the consequences of half our population, mostly African, living in poverty in proximity to nonracial middle- and upper-income communities. This structural fault line was the subject of a lecture I gave a year ago at the University of Cape Town (UCT), “From a two-speed economy to one for all South Africans”, in which a 10 point economic plan to turn the tide towards inclusion and economic dynamism was presented.
A key proposal was for the introduction of a basic income grant (Big). I have more recently homed in on a form of this Big I believe is affordable and would have the most effect. This is an “unemployment grant” for the more than 11-million South Africans aged 18-59 who have no other form of state income.
At R800 a month, the cost of such a grant, which I propose be introduced in the next six months with modalities subject to expert advice, would be about R100bn annually. This represents a modest 2% of SA’s GDP. The state should bring back the Covid-19 relief grant, with modifications as necessary to provide immediate relief.
The following options could be used to fund the unemployment grant:
- A fiscally neutral route via a series of tax reforms and other government savings, as presented in detail in the UCT lecture, excluding any increase in the rate of income or corporate tax but centred on rebates such as foregoing retirement fund deductions and medical aid rebates for middle-class and wealthy individuals.
- An increase in debt equivalent to 2% of GDP.
SA has reached a ceiling for the overall taxes individuals and companies can bear. But modest sacrifices by the wealthy and middle classes over time, without increasing income tax rates, are achievable. It is worth giving up a little to lance the boil and avoid another R50bn looting spree.
Tax reforms take time to effect, time we do not have. The Ramaphosa administration needs to show now that it is acting boldly. So for the first year the unemployment grant would have to be funded by the state, and thereafter the introduction of reforms to tax rebates can lower annual fiscal costs.
Before the critics yell, “But what about our fiscal constraints?”, here are the reasons it is affordable:
- We desperately need to get growth going, and as has been demonstrated by global precedent in response to Covid-19-induced economic shocks, economic stimulus is a turbocharger for growth. SA needs to be equally bold to get its economy growing again. The debt-to-GDP ratio increases if our GDP denominator declines, even when our debt remains constant. Just as we need debt to decline over time, we equally urgently need measures to increase GDP. Doing nothing will just result in rising fiscal pressures. Lost GDP due to “Zuma-economics” and state capture was a sickening R2.5-trillion. Had this not been the case, our debt to GDP now would be a healthy 54%.
- With the good fortune of commodity price boom effects, tax receipts faring better than expected and lower imports, SA’s economy is now estimated to be about 3.5% of GDP better off than anticipated year-on-year. This provides fiscal space to fund economic stimulus measures the markets are likely to absorb. To illustrate why the markets would welcome stimulus, I was told by a major global fund manager that in Brazil at the onset of Covid-19, debt-to-GDP was at about 100% and GDP growth at 2%. After stimulus in response to Covid-19, growth increased to 5% and the debt-to-GDP fell to about 80%. The fund manager believes that in this context the markets “won’t blink” at a 2% increase in debt-to-GDP if it is part of a pro-growth stimulus package.
- The proposed unemployment grant is an investment: not only would it cushion more than 11-million South Africans from hunger but the money would be spent in SA on essential goods such as food and clothing, generating VAT for the government and revenue for retailers. International evidence is that such a grant would reduce poverty and inequality, support nutrition and health, improve educational outcomes, support job seeking, stimulate local economies and assist agriculture as well as informal businesses.
Another focus for stimulus should be small, medium and micro enterprises (SMMEs) hammered by the unrest and pandemic. The government should consider a sizeable scheme, about R50bn, to provide equity capital — not grants — to SMMEs. The likes of the Public Investment Corporation, Industrial Development Corporation, the banks and insurers should partner rand-for-rand with the government and identify businesses to recapitalise, earn healthy returns from and resuscitate. This capital would be an investment in the future of businesses on which millions of jobs depend.
Stimulus should be against the backdrop of a credible, well-communicated and comprehensive pro-growth set of economic reforms to restructure state-owned enterprises, energy, transport and telecommunications and create jobs.
This must also be accompanied by a war on corruption and wasteful and irregular expenditure, and reforms to strengthen, capacitate and modernise the public service and state-owned enterprises and contain the public sector wage bill. The government has started this process with the announcements on SAA, the 100MW energy cap and the corporatisation of the ports. Now it must accelerate and deepen these reforms.
The objective should be to boost economic growth to about 5% annually and reduce unemployment to 20% in five years. In pursuing this objective, the president should be single-minded and expect his team to perform against this single objective.
This three-pronged attack is not divisible. It is not a grants vs job creation or growth trade-off. All three need to be executed together.
• Coleman, formerly a senior fellow at Yale University and partner at Goldman Sachs, is co-chair of the Youth Employment Service and member of The Foschini Group board.
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