Ramaphosa primes the pump
MONEYWEB / 26 SEPTEMBER 2018 - 15.13 / ARNOLD SEGAWA
The core of any stimulus package is to provide tax rebates and boost spending.
President Cyril Ramaphosa last week announced his stimulus package, which is intended to reignite South Africa’s economy. The latest blueprint has a two-pronged approach armed with financial and non-financial measures, which will move to realign core facets of the South African economy with the president’s objectives.
President Ramaphosa to prioritise infrastructure spending and maintenance in order to unlock new jobs. Picture: Shutterstock
As is the norm for economies rolling out fiscal packages to reignite growth, the latest stimulus will intensify infrastructure spending.
During his announcement, President Ramaphosa unveiled plans to prioritise infrastructure spending and maintenance to end the tapering down of infrastructure spend in order to unlock new jobs. Keynesian economics suggests that kick starting an economy would need government spending, interest rate and tax reductions with infrastructure spending being at the core of the recovery.
The past decade has ushered in a new wave of stimulus packages in the form of expansionary monetary policy and quantitative easing, which involves excessive bond issuing by the central bank, who in return re-purchases the assets from financial institutions. The rather radical monetary policy actions have not always been the face of stimulus packages.
Ramaphosa’s announcement on Friday, however, goes back to stimulus basics with a focus on infrastructure spending to spur growth colloquially known as ‘pump priming’. In addition, the President also unveiled plans to prioritise infrastructure with a blueprint to establish a dedicated infrastructure team of specialists in the Presidency named the Presidential Infrastructure Coordination Counsel.
The core of any stimulus package is to provide tax rebates and boost spending. The spending increases demand, which in turn leads to an increase in employment and income taking the cycle back to spending some more. This cycle continues until the economy recovers from collapse but debate remains on how much freedom policymakers should have for increasing spending or cutting taxes has been hard to assess.
Economic advisor Gerald Carlino says: “It remains a contentious issue as leaving interest rates too low for too long coupled with expansionary fiscal policy can in turn contract fiscal space and increase debt pressures.”
Lessons from the ‘Obama stimulus’
In the wake of the 2008 recession, the US Congress passed the American Recovery and Reinvestment Act (ARRA) colloquially known as the ‘Obama stimulus’.
The package included a series of federal government expenditures aimed at countering the job losses associated with the 2008 recession.
Signed in February 2009, the act stood at US$787 billion with over $80 billion allocated to infrastructure projects but most importantly, households enjoyed immense tax breaks. Jens Davids, an independent tax analyst, says: “The rationale for stimulus relies on the notion that in a recession, low household spending is offset by more government spending and the ARRA stimulated demand through tax cuts, tax credits and unemployment benefits. South African households need this too.”
Carlino adds, “The Recovery Act allocated US $425 billion to tax incentives, $208 billion of general government spending and the emphasis on tax incentives goes to show the weight of tax incentives in fiscal stimulus.”
Tax cuts are undoubtedly an easy way to stimulate the economy as they put more money directly into taxpayers’ hands as they increase consumer spending enough to make up for the revenue loss.
Stimulus-absent FDI incentives
South Africa’s Economic Stimulus and Recovery Plan (ESRP) announced last week is grey on reforms to attract capital inflows. Efforts to kick start the economy need be matched with reforms to attract FDI, which promote job creating economic growth.
Annabel Bishop, chief economist at Investec, says: “Accelerating key economic reforms to unlock growth in the economy includes changes to SA’s visa regime, to promote tourism and the travel of highly skilled individuals and restoring investment and exploration levels via the revised mining charter.”
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER