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The greatest financial pressure caused by the lockdown is seen in weak growth in South Africa’s tax revenue, with the government facing a tax revenue implosion, says Russell Lamberti, founder of investment advisory firm ETM Macro Advisors and a member of Panda.
In a presentation for the Sakeliga business group, Lamberti said that this problem is amplified by the fact that public spending has not been cut during the lockdown period. “The net effect is that the South African government is incurring huge debt in 2020,” she said.
He cited Treasury data showing that the government will spend about R2 trillion in its budget this year, but it is forecast to raise only about half of that amount: R1 trillion. “We have seen a colossal collapse in tax revenue in the last four months from around R1.4 trillion to R1 trillion.”
Lamberti said there were already signs of collection problems in 2018/2019, while spending continued to rise.
“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 to finance these deficits by printing money or resorting to the violation of property rights, such as prescribed assets ”.
Lamberti said there are now clear risks associated with this deficit, one of which is a fiscal and default crisis. This will also be detrimental to the currency, he said.
Wrong calculation
The idea that the economy can be shut down, which acts as a ‘life support machine’ for millions of South Africans, was a huge miscalculation, Lamberti said, and shows a misunderstanding of the role of the economy in the country and the contribution it really has.
“The economy is not some kind of cold money-making machine for greedy capitalists. The economy is this exchange production network and it is precisely how we live ”.
Lamberti said the shutdown has subsequently pushed millions of people into economic uncertainty and it was difficult to say how much damage has been caused as the country is still in flux.
Although it is recognized that April, May and June was the worst quarter due to the closing level, he said that the economic uncertainty created will only be seen in the coming months.
“So when we talk about job losses, it’s important that we recognize that there are certain job losses that are temporary, some will be more permanent, and some will take longer to leak into the data.”
He said that while some people may not have lost their jobs during the worst of the lockdown, they may face greater uncertainty in the months and next year.
“When we talk about economic uncertainty it is not just that people lost their jobs. Everyone now faces income insecurity and job insecurity that impact our savings and how we plan ”
Lamberti cited combined data from Google and Oxford showing that the severity of the lockdown also has a direct impact on the country’s economy.
As South Africa had one of the heaviest and strictest blockades, the longer it will take for the country to return to “normalcy”.
“South Africa’s tough lockdown and its inability to come out of immobility quickly means that second quarter GDP could have really been very bad (and) now a 20-30% contraction is likely.
Lamberti said that the ‘irrationality’ of some of the blocking rules had a direct impact on this contraction, including the ban on e-commerce sales and rules on what can be bought in stores.
“E-commerce was the perfect industry to thrive in a blackout situation. That was forbidden during a month and a half of confinement, “he said.
Lamberti said the severity of the second-quarter contraction is important to estimate what total annual GDP will be like, with data showing a possible contraction of -13%.
By context, the fall in South Africa’s GDP from peak to trough during the 2008 financial crisis was closer to -2%. This clearly shows that the country is now in a depression, he said.
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