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CAN GOVERNMENT DO BETTER?

03/08/2022 07:57:00 Bandiswa Vilane

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As the skyrocketing cost of living grips the world, the population looks at governments for some sort of relief and to make life affordable.

In the recent past, we have seen cost of living protests right here in our homeland and the demands among others are a universal income plan and increasing grants for the elderly among other things. Botswana made waves when they cut VAT by two per cent and increased student allowances. This left the nation reeling with the question “If Botswana did it? Why can’t we do it too?” I, therefore, find it fit that I should add my two cents into the debate and bring some perspective outside of the machinery of government.

Tax relief

We are grappling with a cost of living problem, which is essentially caused by a combination of factors including, among others, the global supply chain bottlenecks, fuel shortages, the war in Ukraine (grain not moving) and a rapid demand recovery post COVID-19 out-pacing the supply side response. All these factors contribute to the soaring inflation that everyone is grappling with and as such we need to have the right policies to deal with the problem and not make it worse. A tax relief, I am afraid, would not be the right policy action at this period. It would surge an already robust demand response, and the wealth effect would also induce more spending, this might exert pressure on the general price levels to increase, and that is what we call inflation.

I would advocate that we halt on such agitations until we have arrested the inflation problem, right now a tax relief would have a zero net effect or even negative effect, given the increases in inflation would erode the purchasing power of the tax relief. Furthermore, we have been battling with the problem of balancing the fiscal purse, and tax revenue is a major source of financing for the government. Hence a drastic tax relief will have adverse effects on the current budget, it would mean either cutting on the expected expenditures or finding alternative sources of financing to cover expenditures on health, education, grants etc. We need to think carefully about the policy prescriptions and ensure that we are able to maintain a stable cash flow within the public service.

What shall we do?

I guess the question that begs an answer, therefore, is what shall we do? What can we expect the government and the central banks to do? Well, the base policy action is to always do nothing and let the problem solve itself and hope the adverse effects are minimal. I think I need to commend the Finance Minister on his policy stance in dealing with the crisis, I think I would have done the same in his shoes. We need a targeted policy response to ensure that we do not prescribe policy actions that will worsen the inflation problem.

Setting up the fuel cushion fund is one of such directed programmes that the government can implement at this point to ensure that the inflation problem is not made worse only reduces the rate at which the fuel prices are increasing and does not create a pseudo wealth effect on our consumption patterns. I do believe the minister can do the nation one better to cushion against the surge in the cost of living, probably add bovine meat or chicken or canned meats in the list of zero rated VAT items, this would somehow reduce the commodity basket cost even for a short period of time as the world normalises. I believe that this is a shock in the cash flow that the government can be able to absorb as I believe it would be marginal.
We note that a sum of approximately SZL200 million was set aside for cost-of-living adjustments, this will in itself contribute to inflation, but it is usually termed ‘in built’ inflation. I urge the government to expedite such discussions to ensure that the employees are given a bit of relief and cope with the cost of living surge.

Ray of Hope

Note that the price of Brent Crude oil has been slightly under US$100 for the most of July. Also, note that the price of wheat is now the same as it was before the war in Ukraine. We should expect a decrease in the price of fuel in the next couple of weeks, even if marginal, but much needed relief nonetheless. The first ship carrying grain from Ukraine has sailed from the port of Odessa we hope that the truce and safe passage, this will allow the over 20 million tonnes of Ukrainian grain to enter the global market and will have a positive impact on food inflation. We hope that the safe passage can be maintained to ensure that the flow of grain is maintained in the market. Once the supply chains and the supply side of the economy is restored then we can expect the central bank to also consider reducing interest rates and life will be restored. We need our governments to focus on the supply side so we restore supply chains.