The lockdown and physical distancing measures of government impact small and medium-sized companies severely as they lack the financial reserves to survive the crisis. This article proposes immediate financial measures to support companies, large and small, to ensure that a liquidity crisis does not turn into a solvency crisis, putting many companies out of business – and causing large-scale unemployment. On a macroeconomic level the objective is to protect income and jobs by slowing down the rate at which aggregate supply and demand contract.
The projected increase in the debt-to-GDP ratio is set to occur notwithstanding plans to cut the projected increase in government’s salary bill. If government does not overcome labour union resistance to cuts, the debt burden will increase even more. The mounting public debt and government’s apparent inability to reign it in, raises the question whether South Africa finds itself in a debt trap, and if not, what can be done to escape such a trap.
The debt burden of the national government has steadily increased from 27% in 2007. It is heading towards 70% in 2022/3 if this trajectory is not turned around. Further growth in the debt-to-GDP ratio must at least be halted. Different scenarios show this would require a cut in government expenditure of 2% to 3% of GDP (roughly R100 to R150 billion), phased in over the medium term. This means there is no room for a stimulating fiscal policy.
Creating jobs, reducing poverty III: Barriers to entry and growth in the informal sector – and business cycle vulnerabilities
In this extract from a new REDI3x3 book, the focus is on the constraints faced by informal enterprises in trying to enter, survive, grow, or increase employment. A lower tier of ‘survivalist’ enterprises and an upper tier of ‘growth-oriented’ enterprises is apparent, with barriers limiting entry into the upper tier. Selling into higher-value or formal-sector markets and value chains encounter significant structural barriers. And the sector is particularly vulnerable to severe cyclical downturns.
Exchange-rate volatility can complicate decisions concerning trade and investment and constrain a country’s economic growth. Understanding what contributes to a currency’s volatility is an important first step in assessing whether economic policy can reduce this volatility. For South Africa, changes in global commodity prices and financial-market risk perceptions drive most of the rand’s volatility. However, local political uncertainty also emerges as a significant source of volatility. More policy and political predictability could help to smooth the rand’s volatility.
Have real wages fallen behind or increased out of line with productivity? A macroeconomic perspective
Macroeconomic data on wages and productivity suggest that there has not been any constant tendency for real wages either to fall behind or increase out of line with increases in productivity. Upward shifts have affected real wages sporadically, but have subsequently been offset by downward shifts, leaving a one-to-one long-run relationship between real wages and productivity. This is contrary to the conventional wisdom in both the labour union and business worlds.
In most countries with VAT, certain goods and services are zero rated to alleviate the tax burden on the poor. However, this may not be the most cost-effective way of helping the poor. We investigate the appropriateness of the products currently zero rated and the impact of this on the poor, the implications for tax revenue were it to be removed, and the contribution to poverty relief of zero rating compared to targeted social transfers.
It is estimated that less than half of the present main budget deficit of 5.7% is explained by cyclical factors. The remainder reflects a non-cyclical, structural component of the deficit. The increase in the structural budget deficit since 2008 may constrain the ability of government to sustain its present revenue and expenditure policies. An in-depth understanding of the structural component of the fiscal position as opposed to its cyclical element is important for sustainable long-term government financing and planning.
Many economists have argued that the government’s fiscal stance in the recent budget is verging on the risky. This article argues that the fiscal stance is both correct and prudent. In addition, the article puts the budget in a broader developmental context, highlighting its contribution to long-term growth and development and to tackling poverty and inequality.
Small and medium-sized firms hold the potential to absorb most of the unemployed in South Africa. In this the NDP may be correct. However, the NDP may not be correct in arguing that exports can be the main catalyst of the growth the country needs to address poverty and employment. Several factors hinder such a strategy. A more domestically-focused policy aimed at production (and services) for local consumption might bear more fruit.