A shrinking tax base and short-term thinking are adding to South Africa’s problems: economist

Professional services firm KPMG has published its latest Global Economic Outlook paper, detailing the biggest risks and opportunities facing South Africa heading into 2022.

While the global Covid-19 pandemic may not be over, the research shows major economies are shifting their mindset and focusing increasingly on the potential risks and rewards of a more sustainable long-term recovery and route to sustainable growth.

“If we look at South Africa in the global context, there is no doubt that we need to consider a growth mandate. If we look at the US, China and Japan, for example, the economic outlook is positive – driven by consumer spending, industrial production and easing of supply chain disruptions, among other factors,” said Frank Blackmore, lead economist at KPMG South Africa.

“Similarly, India – most closely aligned to South Africa – has seen a rapid increase in vaccine coverage, a related, benign monetary and financial conditions, and buoyant external demand which is pushing them towards more rapid economic recovery.”

Blackmore said South Africa is in a largely different position, having historically had the challenge of focusing on the long-term goal of economic growth and employment creation. On the other hand, it also needs to deliver a shorter-term goal of expanding the social wage/safety net for those that would have missed being absorbed into the economy, he said.

Shrinking tax base and short-term thinking 

Blackmore said the short-term goal of expanding the social wage has generally dominated the government’s agenda with a rollout and subsequent expansion of a social grant program to the point where more people receive a social grant than are employed.

“Such a strategy may work if economic growth is driving employment creation and the broadening of the tax base, but this has not been the case in South Africa, where the tax base has been reduced over time, resulting in increased pressure on the public sector balance sheet,” he said.

By comparison, he said that the pursuit of long-term economic growth and employment creation has not received much attention and has generally fluctuated along with global markets and commodity cycles.

“Between 2004 and 2008, the economy managed to grow at an annual average of 4.8% before contracting in 2009 due to the global financial crisis.

“Between 2010 and 2015, South Africa managed a more subdued 2.3% annual average growth, and since 2016 had only managed 0.9% average annual growth, not including the Covid-19 induced contraction of 2020. ”

Reversion 

Real GDP is set to grow by 5.6% in 2021, led by contributions from the transport, storage and communication sector, growth in personal services as well as agriculture, mining, trade, catering and accommodation.

However, much of this estimated growth is due to technical base effects following the contraction experienced in 2020, and concern remains that the economy returns once again to pre Covid-19 growth rates of around 1% over the longer term, Blackmore said.

“The forecast deceleration in 2022 is the result of several factors, the first of which relates to base effects.

“Moreover, the economy was struggling to grow prior to the pandemic due to a sustained period of lower investment and consumption spending caused by a reaction to a number of governance failures including policy uncertainty, corruption, ageing infrastructure, the absence of growth-stimulating policy interventions and a general lack of service delivery.”

An expected post-Covid-19 reversion to the longer-term trend would mean the economy reverting back to that lower growth rate once more, he said.

This expected rate of economic growth in 2021 and 2022 will not be sufficient to tangibly reduce the high unemployment rate of 34.4% currently being experienced in the country, said Blackmore

“A national strategic growth mandate would need to be implemented along with the eradication or reduction of domestic barriers to growth and doing business to attain an economic growth rate that would make noticeable inroads into unemployment.”

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