Following the president’s announcement of an R500bn support package aimed at softening the economic blow of the lockdown, questions have been raised about how the money will be spent.
To answer these questions, finance minister Tito Mboweni addressed the media on Friday to unpack the challenges facing SA’s economy, now hard hit by a recession, Covid-19, and independent credit rating downgrades, and when on to discuss the possibility of funding from international finance institutions.
He began by saying that although we are facing enormous economic challenges, we are resilient as a nation and will, therefore, overcome this challenge.
“Our intervention must also be about our people, particularly the poor, the infirm and the vulnerable. It must also be about the businesses – large and small – that drive our economy and create work for our people. It must be about our banking and financial system, to make sure money continues to flow through the veins of the economy.”
Mboweni further emphasised that unsustainable state-owned enterprises (SOEs) are putting enormous pressure on the budget. Going forward, the country’s broader economic response must involve its citizens too – the plan must be people-centred.
The National Treasury has proposed a coordinated fiscal and monetary policy in response to the pandemic.
Mboweni said the state’s response will see Treasury use financial policies in a way that delivers an immediate, targeted and transparent response.
However, he warned that if these two levers work against each other, or if the levers are used incorrectly, then we can be left substantially worse off.
A Coordinated response is needed
Mboweni went on to emphasise that a balance between short-term economic and monetary policy interventions with long-run sustainability is vital. The R500bn package is expected to breathe additional life into the whole financial system which increases the country’s total economy-wide measures to over R800 billion.
The main components of the fiscal responsibility can be thought of in five components, which are:
Under the first part of the package, we are setting aside an amount of R20 billion to be directed to addressing our efforts in dealing with the pandemic.
Secondly, the relief of hunger and social distress which will require the government to substantially increase our social security net.
- R50 billion will be directed towards assisting those who are most affected by the coronavirus. Child support grant beneficiaries (children) will receive an extra R300 in May.
- From June to October, caregivers (typically mothers) will receive an additional R500 each month. All other grants will be increased by R250 per month for the next six months. We will use our existing system to disburse these grants.
- A special Covid-19 Social Relief of Distress grant of R350 a month for the next 6 months will be paid to individuals who are currently unemployed and do not receive any other form of a social grant or UIF payment.
The Department of Social Development and SASSA will outline the details on how this will be implemented, including a smooth application process to simplify the progression for eligible recipients.
The third part of the package consists of an extensive set of tax relief and support measures for workers.
These proposals include:
- An increase in the expanded employment tax incentive amount (from R500 to R750 per employee).
- A skills development charge holiday of 4 months starting on the 1st of May.
- The fast-tracking of VAT refunds.
- Postponing the payment of excise tax on alcoholic beverages and tobacco products.
- The three-month delay of tax filing and payment of carbon tax obligations to the 31st of October 2020.
- The postponement of some of the business tax plans in this year’s budget.
- An increase in the postponement of employee tax
- An increase in the turnover limit for automatic delays.
- The Solidarity Fund has spent R1 billion on personal protective equipment. Up to a third of such donations will be tax-deductible. The limits for payroll giving to the Solidarity Fund will also increase.
- Finally, the government has extended access to living pension funds by allowing individual to adjust the proportion they receive as annuity income, instead of waiting up to one year until their next contract anniversary date.
Further support for businesses will come from an R200 billion loan guarantee scheme, which the President also announced in his speech.
The key features of the Covid-19 loan guarantee scheme are provided in detail on our website.
Fourthly, the phased re-opening of the economy
As businesses open, Mboweni emphasised the importance of screening and testing. "Clear communication strategies are required and it is critical to ensure that people feel protected and safe. Targeted lockdowns will need to be re-imposed where risks begin to emerge".
To achieve this, an approach that determines the measures the government should have in place - this will be based on the direction of the pandemic in the country.
Starting on the 1st of May, the government will focus on three phases.
- Phase 1 - (the phase we are currently in) aims to PRESERVE SA's economy. It is designed to be a set of immediate, targeted and temporary responses.
- Phase 2 -is a plan for RECOVERY from the immediate effects of the crisis. Further details are yet to be revealed.
- Phase 3 -is a PIVOT to position the economy for structurally higher growth. “This virus will be beaten but we must make sure that when we beat it, we do not compromise our long-run sustainability.”
The minister ended by saying that – “as we come out of the coronavirus crisis, we must work quickly to implement our structural reforms to get the economy moving. Virus or no virus, the economy has been growing too slowly for too long”.