DENNIS DAVIS: Finding the money to fight Covid-19
While some call for extensive spending to combat the virus, the real trick will be obtaining the funds to do so
It is difficult to lift our gaze over the horrendous spectre of Covid-19 and the dystopian world we now inhabit, and peer towards the world as it will be after the pandemic is reined in. Yet this is the crucial question for our time.
Recently, a group of economists penned an open letter to President Cyril Ramaphosa setting out a range of recommendations for dealing with the immediate implications of the lockdown and the weeks ahead.
It is difficult, indeed churlish, to criticise their proposals, save to say that without appropriate costing they are, at best, a commendable wish list.
Unlike the developed world, SA is not in a position to do "anything it takes" to stabilise and stimulate the economy. The effect of state capture, both on revenue collection and in the sheer tsunami of cash that was stolen, has compounded the problem. If only we had the billions the Guptas stashed away over the past decade to provide cash transfers to those in need today!
But as it is, scarcity dictates the imperative of our priorities. These should be channelling more resources into the health-care sector, extending grants to staff who aren’t being paid by their employers, and providing meaningfully for the unemployed and informal sectors. Major support is needed for small and medium-sized businesses to ensure they can re-emerge once the economy has been reopened.
Some tentative calculations have been done to establish the cost of extending child grants, support for small firms, employee tax incentives and payments to people out of work. At least R65bn is needed.
We dare not retreat to austerity at the expense of delivering basic goods and services
But it gets more complicated. If we assume tax revenues will fall sharply due to the lockdown, the amount we need increases. The 2020 budget was predicated on GDP growth this year of 0.9%, and the collection of R1.4-trillion in revenue. If that revenue drops by 5%, SA will have a R70bn shortfall.
So how does the country finance an additional R135bn, without damage to the long term? There is about R30bn available from the Unemployment Insurance Fund (UIF) — it should be more, but a decline in the stock market and investments leaves a smaller pot.
Elsewhere, it will help if we plug the tax leakages. Current estimates of leakages in customs, income tax and VAT are north of R50bn a year.
It may also be necessary to freeze public service pay rises for the current year. This will give us a further R30bn.
The wealthy also need to make a sacrifice. While there is presently no reliable information that could allow for the immediate introduction of a wealth tax, it would be possible to add a further tax bracket of, say, 50% for income above R1.5m or R2m. We could also increase dividend tax over a certain amount, or even resurrect the "loan levy system" for companies, with staggered rates from R750,000.
In addition, since some of the infrastructure budgeted for will no longer be built this year, we could divert those funds.
It can’t be left to the state alone to help businesses under pressure — debt relief from banks and rent holidays from landlords are needed too.
While some measure of VAT relief for small businesses is needed, we have to see if the Solidarity Fund can help there, since any erosion of the VAT base will lead to the government battling with its own cash flow.
Available money is one thing; delivering it to those in need is another. Already, there have been depressing reports about the UIF’s capacity. Some economists say one alternative is to push more cash through the child grant system, or to use bargaining council structures to distribute cash to employees. Those not part of any bargaining council could be tracked by using the databases of commercial banks. Time is of the essence; millions need help today.
As SA emerges from Covid-19, it is imperative that we reconfigure our economy in a focused, transformative manner in line with the constitution. We dare not retreat to austerity at the expense of delivering basic goods and services. Equally, decent health care for all, clean water, sanitation and an education system that allows all children to fulfil their talent are central to the constitution’s vision. It can no longer be an optional extra.
The discriminatory effects of the lockdown should also focus attention on the shameful spatial geography inherited from apartheid.
The pandemic has highlighted the crucial role of the state. The US’s chaotic handling of the pandemic is a luminous illustration of the cost of an incoherent public governance structure and incompetent federal executive.
SA will emerge from the pandemic in a position to rebuild only if it is led by a capable government, accountable to the constitution and the people, and purged of the state capture that has so thwarted our best aspirations. If we can do this, it will build confidence that SA can fully participate in a newly configured global economic world.
- Davis is a judge and professor of law at the University of Cape Town, and led the Davis tax committee