Covid-19: The lockdown is being torn apart on the rocks of fiscal miserliness

First published by GroundUp

The lockdown is unravelling. Businesses, which (at best) barely fit the Level 4 requirements, are opening, restricted items are being sold, domestic workers are returning to work, and people are moving around beyond essential needs.

Much of this has been blamed on “irrational” aspects of the lockdown rules.

A valid criticism is that business compliance partially depends on being able to see a logical – and relatively swift – path back to more normal economic activity. Germany is an example of how strict safety rules, testing, and contract tracing seem to have facilitated this (although recent fears of a second wave in Germany raise concerns).

But another reason for the unravelling of the lockdown is at play – fiscal miserliness. If you want people to stay home and businesses to stay shut, you have to pay them to do so. Failing to do so leads to bankruptcies, hunger, and non-compliance.

The government’s “R500-billion” emergency rescue package is failing. Its inadequacy became clear as the ink was drying, but its implementation has been even worse.

It points to a long-standing contradiction at the heart of government – departments that see state intervention as necessary to nurture economic growth (for example, Trade and Industry) are kneecapped by a National Treasury bent on “fiscal constraint”. The crisis has starkly exposed this policy inconsistency.

If the rescue package is to buoy the economy, it must include new spending. It barely does so, relying on moving around existing expenditure and private-sector guarantees. And where new money is being spent, on social grants and relief for businesses and employees, there are serious problems.

Grants

The problems with the child support and special Covid-19 grants show the inadequacy in social relief measures.

As has been widely publicised, the child support grant increase is per caregiver, not per child. This leaves an estimated additional two million more people in extreme poverty.

According to the policy, the R350-per-month Covid-19 grant should be available to anyone not already the beneficiary of another grant. The requirement of proof of residence was dropped on Monday. But government is still tying itself into knots to limit this pool of people. For example, a recipient cannot be receiving “any income” (the casual worker?) or “other Covid-19 response support” (food parcels?), or be resident in a “government funded or subsidised institution” (the unemployed daughter of a nurse living on hospital grounds?). And if you miss a month you can’t claim for it later on, even if you’re eligible.

Because children are the beneficiaries of the child support grant, not the caregivers, the latter should be eligible for the Covid-19 grant, but are not. They are excluded, on the basis that the caregiver is now the beneficiary of the R500 child support “top up”. However, if this is the case, then each child is not getting much more than they would if their caregiver simply got the Covid-19 grant. We’re literally starving our children.

Businesses

The wage support offered through the Temporary Employer/Employee Relief Scheme (TERS) intended to give businesses money to pay their staff during shutdown periods. But it is a total shambles.

According to the TERS website, by Friday 8 May 2020 just over 125,000 employers had benefited from this scheme. Estimates of the number of employers in the country vary wildly, but as of 31 March 2019, SARS had 2 million companies on its register.

This does not include the 680,000 domestic workers registered for UIF (with some working for the same employer). Anyone who has a domestic worker is an “employer” and TERS is available to all employers.

This suggests around 5% of employers have received assistance. This has cost the UIF almost 25% of allocated funds.

A recent survey by The Small Business Institute showed that of the 53% of small businesses that applied for relief-funding, only 6% received funding. At Level 4, only 8.5% of small businesses are back to normal. And 94% of them stated that they are now, or will be within the 30 days, in a cash-flow crisis.

Even if the TERS scheme were functioning optimally, the R40-billion allocated is inadequate. The scheme currently pays below minimum wage and would have enough funds for less than a third of the formal-sector workforce.

Details of the R200-billion loan guarantee scheme have emerged since the emergency package was announced and this appears a relatively well constructed intervention.

However, this scheme is for loans targeted at small and medium firms. Many businesses have already taken on as much debt as they are able to carry and so more loans may not be appropriate. In addition, large businesses are going bust and will need bailouts to prevent thousands of permanent jobs losses.

The government package has violated all the golden rules of fiscal emergency measures – go early, go big, go household.

In this context can we really blame workers and businesses for violating the lockdown?

The alternatives

The measures needed to stabilise the economy are not rocket science, and are being taken by countries around the world. Few policy environments offer such clear-cut solutions.

Regarding the three facets of the package described above the alternatives are clear.

This is what should be done:

Grants:

• Top up the child support grant per child, not per caregiver.


• Institute a universal basic income grant that every adult is eligible for, and make it simple to access. We have previously suggested using the election infrastructure that reaches all communities. Through this government could provide stations over the period of a week where all adults come with their ID, and are issued a temporary card for which they can select a pin. Those that miss out can claim it later. Higher-income persons are taxed to reclaim it and to help pay for others.

• Shift responsibility from the UIF – an inefficient mess – to SARS.


• Make the administration easier and scrap almost all eligibility criteria. SARS should issue each registered employer an automatically generated and completed form, including the amount they are eligible for. They must sign, stating that the funds will be passed on to employees and that their business was closed during lockdown. The money should then be paid into their account (or those of the employees). Falsification can be punishable by imprisonment and tracked after the crisis ends.

• The loan guarantee scheme should continue as is, but with the more flexible eligibility criteria where possible.


• A large fund is necessary for business bailouts. In every case the government should acquire shares in the businesses, and place this in a sovereign wealth fund or special purpose vehicle. The ability to receive dividends from the businesses, or to sell their stakes later on, means the implications for the government’s balance sheet is largely neutral.