The increased financial pressure caused by the lockdown is seen in South Africa’s weak tax revenue growth, with the government facing a tax revenue implosion, says Russell Lamberti founder of investment advisory firm ETM Macro Advisors and member of Panda.
In a presentation for business group Sakeliga, Lamberti said that this issue is amplified by the fact that government spending has not been cut over the lockdown period. “The net effect is that the South African government is incurring enormous debt in 2020,” he said.
He cited Treasury data showing that the government will spend close to R2 trillion in its budget this year, but is set to collect only around half of that amount – R1 trillion. “We have seen a colossal collapse in tax revenue over the last four months from around R1.4 trillion to R1 trillion.”
Lamberti said that there were already signs of collection problems in 2018/2019, whereas spending continued to increase.
“Therefore in the future, we are going to be required to continue paying very high taxes. The other risk is that the government will start funding these deficits by printing money or resorting to violation of property rights such as prescribed assets.”
Lamberti said that there are now clear risks associated with this deficit – not least of which is a default and fiscal crisis. This will be detrimental to the currency as well, he said.
The notion that you can shut down the economy, which acts a ‘life support machine’ for millions of South Africans, was a huge miscalculation, said Lamberti, and shows a misunderstanding of the economy’s role in the country and the contribution it actually has.
“The economy is not some sort of cold, money-making machine for greedy capitalists. The economy is this network of production of exchange and is precisely how we live.”
Lamberti said the lockdown has subsequently thrust millions of people into economic uncertainty and that it was difficult to tell just how much damage has been caused as the country is still in flux.
While it is acknowledged that April, May and June was the worst quarter due to the level of the shutdown, he said that the economic uncertainty created will still only be seen in the coming months.
“So when we talk about job losses it is important that we acknowledge that are certain job losses that are temporary, some will be more permanent and some will take later to filter through in the data.”
He said that while some people may not have lost their job during the worst of the lockdown, they may be facing increased uncertainty in the coming months and into next year.
“When we talk about economic uncertainty it’s not at just people lost their jobs. Everyone now faces income insecurity and job insecurity which impacts our savings and how we plan.”
Lamberti cited combined data from Google and Oxford which shows that the stringency of the lockdown also has a direct impact on the country’s economy.
As South Africa had one of the heaviest and most stringent lockdowns, the longer it will take the country to return back to ‘normal’.
“South Africa’s hard lockdown and failure to quickly come out of immobility means Q2 GDP could have been very bad indeed (and) a 20-30% contraction is now probable.”
Lamberti said that the ‘irrationality’ of some of the lockdown rules had a direct impact on this contraction – including a prohibition on e-commerce sales and rules around what you can buy in stores.
“E-commerce was the perfect industry to thrive in a lockdown situation. That was banned for a month and a half of lockdown,” he said.
Lamberti said the severity of Q2 contraction is important for estimating what the total annual GDP will look like, with data showing a possible contraction on -13%.
For context, South Africa’s peak to trough GDP decline during the 2008 financial crisis was closer to -2%. This clearly shows that the country is now in a depression, he said.