The balancing act
THE budget for financial year 2024/25 has tabled a record allocation to capital projects. This is a commendable allocation for the country since this presents a potential source for growth. This year we expect growth to be driven by government expenditures and the overall purchase of common use items. Also, the minister of Finance tabled a tax proposal that suggests cutting down corporate tax by some two per cent.
The philosophy of financing the public sector requires a good balancing factor; for one to cut down the budget, there has to be a new source of funding. This proposal signals that the minister has foregone some revenue as a result of an improving revenue base from some sources.
The winners
This proposal benefits the producers directly, as the overall costs of production will decrease, thus increasing profit margins as a consequence. I will presume the logic is that improving conditions for businesses will invoke them to expand their operations and hire more labour. As labour is hired into the production process, they will earn an income and as a result improve resilience on the current cost of living pressures we are all currently battling with.
This logic rests solely on the assumption that businesses’ expansion will be a labour intensive process, however, we are living in a knowledge economy, where the rate of mechanisation and capitalisation is increasing exponentially. Entities are continually forced to down size to stay competitive by introducing technologies that improve efficiency and restructuring the arrangement of production. Essentially, the multiplier effect will not be as high as it ought to be when one takes into consideration the profit motive and the current production system.
The losers
Albeit, understanding the broad issues that our economy faces, we need growth, which has been a major challenge that we need to deal with as a country. However, the most emergent need to the liSwati walking on the street is the burgeoning cost of living. It is also imperative to understand that policies aimed at addressing the cost of living need to be cognisant of the fact that the global economy is currently on inflation overheat. Policies to ease the cost of living pressures need not be inflationary, resulting in a delayed cooling of the economy. Growth can be attained through the targeted demand side policies, taking leaf from Joe Biden, the US President’s inflation reduction Bill, which proposed pumping in money to the economy and the consumers to improve on their ability to weather the shocks.
As it stands, the consumer is a loser in this situation as there have been no concessions and considerations to assist the consumer deal with the current cost of living pressures.
I contend that the multiplier effect emanating from a demand side boost would boost growth. Also, this will be an impetus for producers to increase output, hiring more people or capital into the production process.
The jobs that we aim to create would still be created and these would be more sustainable since the supply response will be based on improving sustained demand. I coined this article the balancing act since managing the economy is always a balance act. The proposed tax cuts would have been on the consumer in consideration of the current cost of living pressures. Furthermore, growth through capital projects will have short-term impacts in employment creation.
The capital projects
Driving growth through capital projects is an elusive prospect for the country while we still have rampant cost over-runs. This is an issue that we have been calling on government to look into and one cannot expect growth when project costs are allowed to surge 10 times beyond the initial costs.
Instead, the overall net effect is an increase in public debt, which currently sits at 37 per cent of gross domestic product. These international benchmarks tend to mask the problems that the country faces, yet the tabled budget places debt repayment at E4 billion for the upcoming financial year.
Essentially, these costs will recur for the next 10 years. The sad observation is that these are costs associated with the same projects; we are not adding in new projects as a country. Until and unless we reform the procurement process, we will continue plunging the country into debt and compromise the benefits that the country reaps from these projects.
I propose that government should only commission projects that are fully financed and impose a contract that will push the costs of delays to the contractor. The contracts should also reward contractors for handing over a project before the estimated completion time; this will save the country a lot of money and accelerate our infrastructure development trajectory as a nation.
DISTRIBUTION OF THE BENEfiTS
Another pertinent issue to consider is the distribution of the gains from the pertinent projects. Eswatini is classified as one of the most unequal countries in the globe with a gini coefficient of 0.50. It is imperative that we utilise the government revenue and taxes to improve the distribution of income in the country. I call on government to ensure that all emaSwati, including the small contractors and local communities, benefit from the capital projects, not only as labour, but also as contractors.