The R130bn amounted to 8 percent of the budget, and essentially government faced two options: either cut back on capital spending, or cut back on excessive expenditure items, such as over-employment in some state departments or state-owned enterprises, says  Econometrix chief economist Azar Jammine.  Photo: Simphiwe Mbokazi
The R130bn amounted to 8 percent of the budget, and essentially government faced two options: either cut back on capital spending, or cut back on excessive expenditure items, such as over-employment in some state departments or state-owned enterprises, says Econometrix chief economist Azar Jammine. Photo: Simphiwe Mbokazi

Infrastructure spending cuts may be on cards, says Azar Jammine

By Edward West Time of article published May 6, 2020

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CAPE TOWN - The government will face big challenges to re-prioritise already strained budget expenditure if it is to raise a proposed R130 billion towards the Covid-19 stimulus package, and even more infrastructure spending cuts might be on the cards, Econometrix chief economist Azar Jammine said on Tuesday.

South Africa’s construction industry has been decimated in the past few years while government service delivery has taken a back seat due to spending cuts on all manner of infrastructure such as on roads, hospitals, equipment and schools.

Speaking in an Afrisam webinar, Jammine said the R130bn amounted to 8 percent of the budget, and essentially government faced two options: either cut back on capital spending, or cut back on excessive expenditure items, such as over-employment in some state departments or state-owned enterprises (SOE’s).

He said fixed investment fell 1 percent in 2019, and it was, under the most likely of three Covid-19 economic scenarios that he had modelled for South Africa, likely to decline by 14 percent this year, with very little growth next year and the year thereafter.

In 2019, the latest period where statistics on fixed investment were available, the private sector was better at fixed investment than the government, with private sector investment growing marginally, while the growth by state departments had been in negative territory for 2.5 years, and the percentage for SOE’s had been in negative territory for five years. 

This was because many SOE’s were in financial trouble, and had cut capital spending, said  Jammine. His worst case scenario was for a 22 percent decline in fixed investment spending this year.

He said the country on an unsustainable long term trajectory, as the growth in consumption expenditure over the past five years had not been matched by fixed investment growth.

And there was currently no unaniminity in government about what structural reforms should take place to put the economy back on a sustainable growth path, said Jammine.

Some private sector suggestions included sorting out the SOE’s, reducing corruption, lowering public sector employment, increasing infrastructure spending, improving education, acting against excessively militant labour and reducing over-regulation in small businesses.

However, there were some in government at present still advocating bigger and more government interventions, said Jammine.

“Unless we sort this out, we will head for the lower growth scenario,” he said.

He said government debt servicing costs had been expected to rise to 12.5 percent of gross domestic product in the next few years, but the lower government revenues arising from the Covid-19 crisis, and the government having to pay more for its debt, meant this figure could increase to 33 percent, and in a worse case scenario, 46 percent.

“We could be left in a situation where we are borrowing money just to pay interest on debt,” he said. Borrowing from multilateral finance institutions such as the World Bank, International Monetary Fund and New Development Bank, at very low interest rates, would this be beneficial to help the government through the Covid-19 crisis period, he said.

Regarding the implementation of the Covid-19 fiscal stimulus package, Jammine said the challenge of getting money to consumers who needed it most was done reasonably quickly through the grant system.

But there were logjams in the processing of UIF payments and getting these funds to businesses so they could pay employees. Informal traders were facing difficulties in 
accessing trading licensing applications.

And most of the corporate donations for small and medium enterprise relief were over subscribed and the donations had already run out, he said.

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