PETER ATTARD MONTALTO: Recovery needs to be fast and vast enough to support Big safety nets

Posted in: Economics, i-Blog, Politics on May 17, 2021


South Africa’s recovery needs to be fast and vast enough to support Big safety nets.

This column was first published in Business Day. 

As public vaccination (supposedly) finally starts on May 17, the economy takes a tentative further step towards recovery.

Yet some sobering facts don’t seem to fully have sunk in. The first is that of a likely permanent loss of output in the economy. The economy will take another two years to return to 2019 real output levels but it will never recover to the level of trend output one would have expected it to be at in the future.

The situation is more sobering when one thinks about output in per capital terms. The population is continually growing at just below 1.5% a year. Yet the size of the whole economy is likely to grow only marginally above this level in the long run beyond 2023. And until then we are not going to get back to 2019 levels of per capita economic output (which let us not forget was lower than in preceding years — per capita growth had been negative for some time).

This is why the question of “recovery to where?” is important. Not recovering to the same level of per capita output implies, other things being equal, a higher likelihood that there will be few jobs as a share of the population. Indeed, this is the key risk that seems forgotten in the debate — that while the economy now grows and new jobs are created, there becomes a cohort of maybe about 1.5-million people, by my estimates, who do not recover back to the same place in the labour force. They either become unemployed, or work fewer hours or have to accept lower pay. This cohort will last forever if the economy does not start growing and recover lost ground in per capita terms.

This number — lest it needs driving home — is politically, socially and morally huge and creates associated risks with it.

This is also why we need to discuss social safety nets, as Isaah Mhlanga did recently in these pages. While various sides of the ideological spectrum might disagree on labels and modalities, I don’t particularly like the idea of a universal basic income and think a lack of means testing fails to pass policy design and efficacy muster. There is now broad consensus across the spectrum that a social safety net is needed in the form of a basic income grant (Big). However, it is unaffordable in this fiscal climate and with the current delineations of expenditure priorities.

So the yardstick of the recovery — in part — becomes how can we grow the economy fast enough to afford a Big? This means achieving fiscal sustainability through higher long-term potential growth.

We have a short-term hump to get over. The Treasury this year is likely to get about R57bn more revenue than they said at the budget in February, according to my forecasts, thanks to the ongoing commodities price boom. The clamouring for this cash is likely to come in the months ahead. But it is likely a one-off or very short-term (two to three years) boon that you can’t construct a permanent social safety net around.

The “excess” cash has some use though — to reduce debt levels now and to lower the risks of redemption of bonds at the start of 2023. The need to flatten the yield curve through better debt management strategy is a public good in and of itself to reduce the “crowding out” effect of banks’ lending to the private sector.

But all this is marginal when trying to shoehorn a Big into the fiscal framework. Once again, there is a need for zero-based budgeting with proper prioritisation parameters. Choices are needed.

A Big is more important than preserving positive real increases in public sector wages. It is also more important than preserving the number of public sector employees.

The public knows this instinctively no doubt, but the unions cannot engage on the point. The frothing of many when one raises this issue is always amusing. The appeal to the hardworking nurse or the grinding desk officer in ad hominem attacks shows up the complete lack of understanding of the motivations, family backgrounds or policy positions of those on the other side.

The need to slash the unproductive in the state through productivity reviews and the call for wage restraint is exactly meant to create space within the fiscus to hire more nurses and teachers and to reduce the need for a Big.

The real divide is becoming increasingly apparent. A whole system view that considers the outputs and the scale of problems and scale of solutions vs those concerned with the inputs (as Stuart Theobald laid out in these pages a week ago). The divide is between those who want to co-ordinate and those who want to enable.

How is SA going to reach higher levels of potential growth by focusing on the inputs and managing the vested interests around them? Is it by listing products that must be procured from small, medium and micro enterprises; or controlling a complex and rapidly evolving energy supply system? Yet the plan now is for more central co-ordination of private sector investment from the presidency. Apparently, the private sector must be lined up like little battalions on a big map in the Union Buildings.

In this world, the economy is a fixed system where one imported item can be substituted for a domestically produced one through someone pulling a lever in Pretoria despite the capacity not yet being present locally. This is a world where the creation of individual projects or black industrialists is satisfactory progress.

These kinds of solutions will not create the productivity and the scale of recovery to drive a large enough recovery to afford a Big. Sure, there is always the exception example — there is a local firm that produces things instead of importing them. Yet the issue remains the scale of the whole economy, of the fiscus, of the jobs crisis — the surface of which is barely scratched.

The debate here seems to have barely started. Funders whisper that the co-ordination rather than enabling of infrastructure isn’t shifting the number of projects that are bankable. Companies continue to do their thing and hunker down, eyes are rolled at suggestions for workers on boards or similar plans.

But a real debate is needed on creating scale and the outputs required. The prize is a sustainable social safety net and jobs, as much as it is investment or profit.

Attard Montalto is head of Capital Markets Research at Intellidex, an SA research-led consulting company.

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