Closing the economic gap through genuine reform and partnerships

The spread of COVID-19 since the beginning of 2020 continues to have a devastating impact on South Africa’s s socio-economic environment. Unfortunately, the spread of the virus escalated dramatically as we entered 2021, with a fresh surge in COVID-19 cases since December 2020, resulting in the reintroduction of extended level 3 lockdown measures.

In an effort to limit the effects of lockdowns on economic activity, household income and corporate earnings, save jobs, and contain the spread of COVID-19, the government introduced several relief schemes and initiatives. These initiatives included tax relief measures, a R500 billion fiscal stimulus package and several programmes to help SMMEs and their employees across sectors most affected by COVID-19 and lockdown measures.

While many of these programmes genuinely helped some companies, the success rate is not uniform across the various schemes. On the one hand, the Tourism Relief Fund was able to disburse its total R200 million budget to help 4 000 companies. However, arguably the fund itself is not enough to address the industry’s needs. On the other hand, the performance of the R200 billion Loan Guarantee Scheme has been dismal. Since its inception, participating banks have only approved around R17.84 billion in loans under the scheme, with the value not expected to surpass R19 billion.

In terms of tax relief measures, government announced multiple measures, including several tax payment deferrals, fast-tracking VAT refunds, and a tax subsidy to employers. These measures were expected to provide support for businesses to continue operating and pay employees and suppliers.

While it’s hard to ascertain how much support companies actually received, monthly tax revenue collection data from the National Treasury shows that there has been a significant slowdown in tax collection from some tax categories beyond the effects of slower economic activity. For instance, from April to December 2020, the skills development levy collection contracted by 44.5%, the most significant drop in any tax category. At the same time, VAT refunds throughout the year have accelerated, growing from about R16 billion in February to over R20 billion in December.

The COVID-19 related lockdowns led to a substantial decline in South Africa’s economic growth in the second quarter of 2020. Positively, GDP growth rebounded at the start of the second half of 2020, surging by a massive 66.1% quarter-on-quarter, seasonally adjusted and annualised. While the bounce back in economic activity resulted from the lifting of the severe COVID-19 lockdown measures, the cuts in interest rates by the SA Reserve Bank and the increased and extended social payments and other relief measures by the government provided further support.

Although the South African economy improved far more than expected in Q3 2020, the subsequent resurgence in COVID-19 infections unfortunately dampened the recovery into the first part of 2021. For 2020, South Africa’s GDP is expected to have contracted by around -7.4%, while for 2021, GDP growth is forecast at around 3.5%. Considering that between 2015 and 2019, South Africa achieved an average annual growth rate of only 0.8% and a mere 0.2% in 2019, growth of 3.5% in 2021 appears encouraging. Still, it is well below the level of output required to reverse the losses experienced in 2020. South Africa’s economic growth needs to be at this level on a sustained basis to generate a meaningful increase in employment.

The main driver of the economic recovery is the strong base effects, as all sectors of the economy continue to recover from historic lows. In addition, the global recovery should support South Africa’s rebound. A generally weaker rand, coupled with strong commodity prices should boost key mining exports, also helping South Africa’s economic performance.

Given that consumption makes up almost 60% of South Africa’s GDP, the rebound in retail activity and the service sector will be important in South Africa’s growth trajectory for 2021. The consumption recovery is expected to be led by high-income consumers who have kept their jobs and maintained their income during the pandemic. While the sharp rise in joblessness disproportionally affected low-income consumers, they benefitted from the top-up in social grants, the COVID-19 relief of distress grant and employment programmes. The historically low interest rates and the subdued inflation rate has also led to a recovery in retail activity, although this has been uneven and relatively slow.

Although the recovery in economic growth is highly dependent on the successful distribution of effective COVID-19 vaccines, this could be stalled by ongoing load shedding and the threat of government implement stricter lockdown measures in response to any future resurgence in infections. Consequently, limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges are key immediate priorities for South Africa.

In trying to improve South Africa’s growth performance in the medium to long term, this year’s National Budget’s policy choices reflect that fiscal policy is currently ineffective in directly revitalising the South African economy. In particular, government cannot afford to cut taxes extensively to boost household consumption and corporate investment given the extreme fiscal constraints. Equally, the National Treasury has very little scope to meaningfully further increase public spending, given that its current debt trajectory has worsened considerably.

With that said, government’s growth initiatives need to move ahead rapidly in trying to initiate a wide range of private/public partnerships to stimulate growth and employment. This includes continuing to make it easier to do business. Fortunately, there is a clear intention on the part of government to implement a range of drastic changes to the government’s budget in order to control expenditure, but at the same time find a way to implement a series of growth-friendly policy initiatives, including government’s infrastructure initiative.

Ultimately, the success of the government’s growth and employment agenda in 2021 and beyond will be determined not by the quality of its policy documents but instead by its ability to make progress in implementing real reforms that encourage the business sector and population in general. Closing the gap between South Africa’s current trend growth rate, and a modest target of 3% on a sustained basis is going to require a significantly greater implementation effort than is currently evident, including the coordination of economic policy across key government departments and actively partnering with the private sector.