Perhaps the most substantial and most enduring impact of Covid-19 will be the dramatically increased levels of debt on almost all global government balance sheets. The economic impact of the pandemic has severely affected both the income and expenditure sides of the fiscal equilibria – as tax revenues plummet due to decreased economic activity and increased unemployment; and expenditure soars as governments accelerate stimulus and financial support to unprecedented heights. The saying, money doesn’t grow on trees, comes to mind as governments face balancing the support of their economies, whilst figuring out how to fund the shortfalls.
This week saw the focus on this conundrum in the US and locally, as the US Stimulus Package became a political football leading up to the 3 November election, and President Ramaphosa sought to convince South Africans that the fiscal tsunami can be turned. Finance Minister, Tito Mboweni, is soon to follow and the task at hand is so problematic that he has asked for an extra week to prepare for his Medium Term Budget Policy Statement. That’s akin to asking for an extra week to solve Fermat’s Last Theorem.
At this rate, there is no option but for future generations to inherit, not prosperity, but a mountain of government debt from their predecessors, with the hope that they can reflate their way out of it by economic growth or by debasement. Let us hope that the solution to this enigma is discovered in less than the 357 years it took to solve Fermat’s.
“A society grows great when old men plant trees whose shade they know they shall never sit in.”
– Greek Proverb
- Markets continued to react this week to the political back and forth over the second US stimulus package. Most recently President Trump said he would support an even larger stimulus package than the $1.8 trillion proposed by the White House to Congressional Democrats. This conflicts with both sides and is an undefined statement leaving many convinced that the relief aid will not be approved before the election.
- The Covid-19 pandemic may cost the US government $16 trillion, according to former US Treasury Secretary Lawrence Summers and fellow Harvard University economist David Cutler. This would amount to four times the cost of the Great Recession of 2008-2009. Around half the amount is related to the loss of Gross Domestic Product (GDP) resulting from the economic shutdowns, while the other half comes from health costs such as premature death and long-term health impairments. Follow this link for more.
- The factors above mean that the US budget deficit has reached an estimated $3.1 trillion for the fiscal year. The Congressional Budget Office published their Monthly Budget Review that stated that the deficit is an estimated 15.2% of the GDP. This is the largest gap since 1945 and more than triple from last year’s shortfall.
- The UK budget deficit has hit £173.7 billion in the first five months of the fiscal year under the Covid-19 lockdown restrictions. Britain has now borrowed more since a national lockdown was imposed in March than during the whole of the year following the 2008-09 financial crisis. The figures come a day after Chancellor of the Exchequer, Rishi Sunak, unveiled a £5 billion plan to rescue millions of jobs and businesses from a winter crisis as a resurgence of Covid-19 threatens to derail the economy.
- Turkey and Greece are also facing mounting government deficits. Greece registered a primary deficit of €7 billion in the first nine months of the year whilst the target was for a primary surplus of €2.6 billion. Turkey’s budget deficit expanded by 67% in September compared with the same month a year ago. The latter sets the tone for the mounting impact of Covid-19 on emerging markets.
- The result of these ballooning shortfalls is that there may be a swing in focus – away from interest rates, to deficits and debt ratios – as drivers of exchange rates. Tommy Wilkes from Reuters has written an article analysing which countries may be the winners and losers in the battle of the deficits. Winners include Norway, Sweden and Australia, which have been rallying against rivals who have relatively higher deficits and debts as a proportion of GDP. While the pound, the Canadian dollar, various emerging market currencies and even the mighty US dollar may fall behind. Follow this link for the article.
- President Ramaphosa presented an outline of South Africa’s recovery plan. Its core focus is infrastructure and mass employment and includes three more months of the R350 grant. Additionally, Ramaphosa addressed energy security, digital transformation, fighting corruption, and boosting state capacity. He said that: “Our recovery will be propelled by swift reforms to unleash the potential of the economy, and supported by an efficient state that is committed to clean governance. It will be transformative. It will be inclusive. It will be digital, green and sustainable, and it will invest in our human capital to lay the foundations for the future.”
- Civil Society Organisations, including COSATU and SAFTU, had gathered earlier in the week, calling on the government to extend the Covid-19 Social Relief of Distress special grant for at least five months until the end of the financial year. The president has compromised by providing three more months, so far. Again, it is a question of where will the money come from?
- Finance Minister Tito Mboweni asked that the Medium Term Budget Policy Statement be postponed by a week, deferring it to the 28 October 2020. In June, Mboweni warned that the country faced a sovereign debt crisis if economic growth continued to stagnate. He also projected that the deficit would increase to 14.6% of GDP, a major increase from February’s projected 6.8%. The full extent of the economic impact of Covid-19 and the plan to recover from it may become clearer after the MTBPS on the 28th.
- However, a research note from Momentum Investments analyses the challenges that the Finance Minister and his team are facing, given that South Africa’s tax base is shrinking, the country is in a recession, debt levels are climbing, unemployment rates are high, and State-Owned Enterprises continue to receive massive bailouts. Our concern is that the rhetoric around the solution being on the expenditure side of the equation and not the income (tax) side is changing.
- This is evidenced by the potential taxes and changes proposed by the President’s Economic Advisory Council ahead of the MTBPS. These include: Increases to the fuel levy and estate taxes; a three-year ‘solidarity tax’ that would increase taxes for higher earners; the introduction of a basic-income grant that could cost R243 billion a year and would necessitate tax increases; and that pension funds and other private investors would back infrastructure projects if there was a clear pipeline over the next 10 to 20 years.
Sources: Dynasty, Reuters, Bloomberg Markets, The New York Times, Daily Maverick, and Moneyweb, etc