South Africa’s Finance Minister Tito Mboweni needs to take several steps in his emergency budget on Wednesday.
Mboweni is well known for his striking phraseology and metaphors. In a recent budget briefing to Nedlac, for example, he compared the diverging revenue and expenditure lines of the South African fiscus to a yawning hippo’s mouth.
‘Striding purposefully with shoelaces untied’
He labelled the task of repairing the South African fiscus a “Herculean” one. And he has frequently tweeted pictures of himself looking isolated and embattled – under a tree, for example, or striding purposefully with his shoelaces untied.
Perhaps in his Supplementary Budget to Parliament on Wednesday he should cite Ernest Hemingway’s The Sun Also Rises.
“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
On Wednesday 24 June, the minister will declare that the projected budget deficit for 2020 is 14% and debt to GDP is likely to be over 120% by 2025.
South Africa has been going bankrupt gradually for years. It is now starting to go bankrupt suddenly.
Seven pointers for Mboweni
There are seven things he should announce to prevent this.
- First of all, and most importantly, this Supplementary Budget needs to be ambitious. He must frame it as such upfront. The critical moment to reframe the debate around economic policy has arrived. This budget is about more than simply raising revenue and spending less. Rather, it is about rebuilding the social contract, reimaging the economy, and driving growth. The plan must be coherent, multidisciplinary, and aligned with all other parts of government. A facile set of spending cuts and tax hikes from Treasury will be insufficient and underwhelming. Extraordinary times call for extraordinary measures.
- There can be no more state-owned enterprise bailouts. On Thursday 25 June the business rescue team will vote on the package for SAA. Whatever it says, Treasury should refuse to pay for it. Instead, the state should pay back SAA’s creditors who hold government guaranteed loans and refuse point blank any further investments into an airline. Similarly, the Eskom that exists in its current state has run its course. Treasury should fasttrack private sector solutions for power generation and infrastructure construction.
- In his pre-crisis Budget in February, the minister announced R160m of public sector wage cuts over the next three years. 2023 has just become 2020. These cuts need to be fast forwarded and should come into play immediately. This would be a massive step towards attaining budget sustainability over the medium term.
- Spending cuts are not enough. What we need more than ever is an economic recovery which must come from outside the bankrupted public sector. We need to kickstart productivity growth across the South African economy. As I argued last week, Mboweni should announce that the DTI and the Department of Labour are appointing a non-political taskforce of experts. These should be drawn from academia and the private sector, and advise on what microeconomic measures should urgently be implemented to increase productivity and create jobs. For example, this could include slashing the red tape and bureaucracy around starting businesses, simplifying labour laws to make it easier for firms to employ people, incentivising private sector investment, and simplifying the administrative and fiscal burden on small and medium sized firms.
- The Minister should announce that SARS will continue to be rebuilt after the torrid Zuma years that wreaked havoc on the organisation. There is an urgent need to crack down on tax evasion, but also simplify the burden of tax administration for SMEs. This should be achieved through the increased digitalisation of the revenue authority.
- Essential details are needed around the deployment of the Recovery Plan announced by President Ramaphosa. Key to this is how exactly this plan is going to be used to drive growth. He should announce that the funds will be deployed to drive private sector growth through investments into SMEs. They will therefore be able to access preferential terms of funding. This should be both for existing and new firms and will be vital for job retention and employment creation. The government should do whatever it can to enable entrepreneurs to become the backbone of South Africa’s economic recovery.
- Finally, central banks are providing previously unimagined waves of liquidity into credit markets to try to temper volatility in bond markets and prevent waves of bankruptcies. This liquidity has trickled down into the emerging market and has kept a lid on the borrowing costs of borrowers like South Africa. He should announce that we are going to take advantage of this to remould the debt profile of the country. South Africa is burdened with extensive short-term debt which should be swapped into longer maturities. This would substantially reduce refinancing and default risk of the country.
As the old saying goes, you should never let a crisis go to waste.
This crisis is the opportunity to rebuild and restart the economy as a dynamic, flexible, and business friendly investment destination. No cows should be held as too sacred not to be sacrificed to meet this goal.