Ramaphosa primes the pump

President Cyril Ramaphosa last week announced his stimulus package, intended to reignite the economy. It has a two-pronged approach, armed with financial and non-financial measures to realign core facets of the economy with the president’s objectives.

Ramaphosa unveiled plans to prioritise infrastructure spending and maintenance to end the tapering down of infrastructure spend to unlock new jobs.

His announcement goes back to stimulus basics with a focus on infrastructure spending to spur growth colloquially known as “pump priming”. He also unveiled a blueprint to establish a dedicated infrastructure team of specialists in the Presidency.

The core of any stimulus package is to provide tax rebates and boost spending. The spending increases demand, which leads to increased employment and income, taking the cycle back to spending. This cycle continues until the economy recovers from collapse, but debate remains on how much freedom policymakers should have for increasing spending or cutting taxes.

Economic advisor Gerald Carlino says: “It remains a contentious issue as leaving interest rates too low for too long coupled with expansionary fiscal policy can in turn contract fiscal space and increase debt pressures.”

Following the 2008 recession, the US Congress passed the American Recovery and Reinvestment Act (ARRA) or “Obama stimulus”. The package included a series of federal government expenditures aimed at countering job losses.

Signed in February 2009, the act stood at $787 billion with over $80 billion allocated to infrastructure projects but households enjoyed immense tax breaks.

Independent tax analyst Jens Davids says: “The rationale for stimulus relies on the notion that in a recession, low household spending is offset by more government spending and the ARRA stimulated demand through tax cuts, tax credits and unemployment benefits. South African households need this too.”