Post-Covid-19 SA will need a natural ‘stimulus package’

Switch on any global news channel and you will be confronted with panels of experts discussing the forced closure of businesses around the world owing to the Covid-19 coronavirus and the free-fall of the global economy.

All signs point to a continued haemorrhaging of livelihoods, especially for the working class, even after the world finally gets the virus under control.

South Africa’s government will have to make brave and tough choices, including a natural stimulus package of income, VAT and corporate tax cuts, reduced government spending, as well as drastic deregulation of the labour regime.

This will get our economy back on track and provide long-term impetus for South Africa to become a prosperous and wealthy nation.

In the US, there is talk about getting money directly into the hands of Americans through a universal basic income-style cash transfer.

In South Africa, we already spend a hefty amount of the budget on cash transfers via social grants. With state-owned enterprise bailouts and the National Health Insurance’s seemingly unstoppable and unaffordable implementation on the horizon, we simply cannot hand out cash to thousands, perhaps hundreds of thousands, more people who will lose their jobs in the economic bloodbath.

We can, however, put money directly into the real economy and into people’s hands by cutting both income and VAT. We need to incentivise middle and upper-class South Africans to spend in the real economy and therefore spur demand and employment.

This will cut into government’s revenue collection streams, but President Cyril Ramaphosa will need to have courage, take on the powerful unions’ expected resistance and commit to not only cutting government spending in general, but also to cutting government salaries across the board in particular.

We need all hands on deck because whichever way we slice it, we will not come away unscathed when the dust settles.

South Africa needs to be made an attractive investment destination. This can be done by cutting the corporate tax rate. There are millions of young, low-skilled, unemployed people, and a continent that needs kettles, irons, blankets and other necessities.

Global firms will want to diversify their operations post the Covid-19, and we can capitalise on this as we have the labour force and the sophisticated banking infrastructure.

The minimum wage would need to be abandoned and the heavily regulated labour environment relaxed.

There are those who will object to this approach and regard it as the exploitation of workers. This is a valid concern, however, in free markets with low levels of labour regulation, labour is absorbed until supply is exhausted because wages are low in order to meet the oversupply of labour.

Demand then goes up as more workers are employed and a shortage of labour starts to develop.

This compels employers to improve their terms of employment and working conditions or lose out to the competition. Moreover, employed workers’ bargaining power increases owing to work experience and on-the-job training.

This happened in New Zealand in 1990 after the drastic deregulation of labour. Taiwan and Hong Kong in the 1960s had about 3% to 4% unemployment and incrementally rising wages. In the 1970s, manufacturing wages rose by 8% per year in real terms.

Given a conducive entrepreneurial environment, workers can even identify more opportunities to start their own small businesses, creating an even greater virtuous cycle of employment, especially given the large pool of labour available in the country. This could unlock the economic potential of our townships as well.

Furthermore, we have experienced what happens, even before the spread of Covid-19, when the government does not make tough choices around labour, policy and taxes. Industries are haemorrhaging jobs and losing their competitiveness. The sorry tale of the decline of South Africa’s textile industry is one example, as are the profound job losses in the mining industry.

Is South Africa in a position to disregard any possibility of growth, even with a low-wage environment to start with?

Before the virus, our unemployment rate sat at on par with that of the US during the Great Depression, and we can assume that it will get significantly worse as the virus continues to spread.

Government simply does not have the money to continue spending its way out of problems, and upper-tier taxpayers are dwindling as they leave for greener pastures. Government cannot redistribute an ever smaller wealth pie.

We need to do things differently and encourage value creation in the real economy, rather than mere redistribution. Wealth generation will be an effective long-term antidote to the terminal decline of the economy.

Vabaza is an avid writer and aspiring economist. The views expressed in this article are those of the author and not necessarily those of the Free Market Foundation

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