Read the following extract and answer the questions that follow.

The President of South Africa, Mr Cyril Ramaphosa made several statements on the recovery plans during the Covid-19 pandemic. The Minister of Finance would then follow with his statements on the financial plans and outline how the recovery plan would be implemented. Below are extracts from some of the statements by the President and the Minister since March 2020. The Minister outlined the steps and policy options undertaken by both the fiscal and monetary authorities. In addition to the proposed options, he outlined a supplementary/revised budget on the 24 June 2020. These were followed by medium-term budget policy statements in October and the national budget in February. Below are some extracts from the minister'sspeeches.

Minister's remarks on COVID-19 and economic challenges (14 April 2020)

The government, through the National Treasury, is exploring all funding avenues to finance all Covid-19 related programmes and measures aimed at addressing the pandemic. The funding avenues will not be limited locally but will include exploring all global partners and international financial institutions. Funding transactions will be announced officially once concluded.

Going back to opportunities emerging from this crisis, we as the government have reiterated, the commitment to implement structural economic reforms to address the weak economic growth, constrained fiscus, and ailing state-owned companies. The Covid-19 pandemic and measures taken to address its spread have had a substantial negative impact on economic growth and the government's fiscal position. The pre- existing fiscal position was precarious, and we must ensure that whatever we do does not harm our long-run fiscal sustainability. The fiscus' ability to respond to a crisis is weak. The 2020 Budget was already mildly expansionary and supportive of growth. In particular, the fiscal consolidation path was designed to strengthen our fiscal health. Fiscal health is a necessary, but not sufficient condition, for sustained growth. Several priority areas were growing at above inflation rates including capital spending.

Beyond the Covid-19 crisis, a major risk facing the economy and the fiscus is if long- run economic growth returns to the pre-crisis averages of between 1 to 2 %. Higher levels of economic growth need to become a non-negotiable objective. In the absence of urgent structural reforms, the considerable fiscal actions to mitigate the current crisis may leave the fiscus on the edge of a cliff. For example, we must, without any hesitation, act to implement the President's announcements on electricity, and rapidly work to implementing the range of reforms that we had already set out.

Supplementary budget (24 June 2020)

The debt-to-GDP ratio is expected to be about 80 percent in the current financial year 2020/2021 and the economy is expected to contract by 7.2 percent. While the forecasted contraction will be the highest and worst since the Great Depression, the economy is expected to record an estimated shortfall of about R300 billion, of which R26 billion is the foregone revenue as part of the Covid-19 relief package announced by the president of the Republic in March 2020. The government also intends to borrow about R7 billion from multilateral institutions for its response to COVID-19. The tax relief actions include an increase in employment tax incentives, deferral of tax liabilities for businesses, and consideration of applications to defer tax obligations without penalty for businesses that are unable to pay their due amounts as a result of the pandemic. The supplementary budget also seeks to address the problem of spiralling debt.

Finance Minister's statement on recovery plan (28 July 2021)

This statement was made following the President of the Republic of South Africa. The aim was to support the recovery of the economy and provide relief to the poor in the wake of the spate of violent unrests and the ongoing Covid-19 pandemic. Recent events have had a serious impact on South Africans as well as the economy. The implementation of both level three and level four lockdowns will have an impact on economic output, but the underlying factors that allowed us to project a recovery in GDP this year remain largely in place. This is helped by a more supportive global environment and continuing accommodative monetary policy.

In the short-term, because of the lockdowns, we can expect to see the impact of weaker consumer sentiment, business confidence and demand for certain products filtering through into weaker manufacturing production and wholesale trade sales. Based on high-frequency data from Stats SA, in the current lockdown, retail sales and transport activity were the most negatively impacted by the restrictions imposed during the third wave, while most other economic activity continued to recover. Over the medium-term, the National Treasury still projects that the South African economy will only return to pre-Covid levels (Q4 2019) in 2023, reflecting the significant and negative impacts of the pandemic and associated lockdowns on the economy.

Impact of the unrest in Kwazulu-Natal and Gauteng

The social unrest experienced in KwaZulu Natal and Gauteng provinces will likely inhibit business confidence, reduce private investment and future GDP growth. This will constrain economic recovery at a time when business confidence is already weak and at levels last seen in the fourth quarter of 2014. If riots persist - even at smaller magnitudes and in pockets of the country - they will have a lasting negative impact on confidence, private investment and growth. As stated by the President, the government is working to ensure that peace and stability are maintained throughout the country and that those attempting to subvert our democracy are held to account. While the vast majority of the damage may be covered through insurance, the real knock to the economy is the damage to business and investor confidence. Measures were taken immediately after the unrest sought to quickly restore normal operations.

Economic reforms for growth and the fiscal framework

Swift implementation of economic reforms is critical and would be an inexpensive and rapid way to simultaneously improve South Africa's growth trajectory, improve confidence and create fiscal space. In the short term, the credibility gains from well- executed reforms can be reflected in a lower risk premium and reduced borrowing costs, which frees up fiscal space.

In the medium term, the improved confidence levels spur greater investment, lead to faster growth and a flatter debt trajectory. This creates a positive feedback loop from lower debt andgreater fiscal credibility, lower risk premium and lower borrowing costs across the economy. At the same time, the improved investor and consumer confidence translate into higher levels of investment and consumption which also feed into higher growth. The macro-fiscal context will remain constrained as a consequence of the unrest and the lockdown. In this environment, Government will strive to provide continued support to the economy and public health services in the short term. As presented in the 2021 Budget, the main budget deficit and debt-service costs over the medium term are projected to remain higher than the pre-crisis levels. The Government will need to finance a gross borrowing requirement of R550 billion or 9.7 percent of GDP on average for each year of the MTEF. Debt-service costs will take up 21 per cent ofall revenue collected by the government over the period.

Covid-19 pandemic and unrest support package

On Sunday 25 July 2021, the President announced a fiscal support package to respond to the recent developments in the Covid-19 pandemic and unrest, mainly in KwaZulu-Natal and Gauteng. As outlined, in the measures that the government sought to implement, it is important to reflect on our fiscal challenges. South Africa's fiscal situation remains serious and should not be conflated with the capacity of advanced economies, as some commentators mistakenly do. Government finances remain at substantial risk, including due to the debt burden of over 80 per cent of GDP and the rising debt service costs, which now consume more than R1 out of every R5 raised in taxes. South Africa is not an advanced economy, and it is untrue that a government which prints its own currency cannot experience a debt crisis. Fiscal adventurism is not the

solution to South Africa's problems. We will continue our strategy of restoring the health of public finances. Against this backdrop, a package of measures is proposed which will be carefully financed to avoid further damage to the public finances. It should also be underpinned by greater urgency in the implementation of growth-enhancing reform.

The package is also underpinned by an acceleration of the vaccination programme. At the time of the February budget, we estimated that the cost of the vaccination programme would be around R19.3 billion. We have committed to making whatever resources are required to ensure its success. R4.3 billion was already allocated to the Department of Health. We are now augmenting this allocation by making an additional R5.3 billion to the Department of Health from the contingency reserve for more vaccine purchases and logistical arrangements.

The South African Special Risks Insurance Association (SASRIA) will form a key part of the intervention to help insured businesses restore their operations. Together with reinsurers, SASRIA has already begun its claim administration process. Payouts will be honoured to all covered businesses. Crucially, the government has decided to provide full financial backing to SASRIA should it exceed its solvency limits. The National Treasury is putting in place the necessary arrangements to ensure that this commitment is met should it be needed.

Qualifying uninsured businesses will be supported by the state, partly through a reprioritisation of the existing support mechanisms for SMMEs. The Government is also engaging with relevant stakeholders (NEDLAC, banks, insurance companies, and community organisations) to deal with the challenges facing uninsured businesses.

It is expected that the package will amount to R38.9 billion of on-budget items, including revenue measures of R5 billion and spending measures of R33.9 billion. As required by section 32 of the PFMA, the National Treasury will publish the quarterly revenue and spending position of the government at the end of this week. These fiscal indicators will show that government is sufficiently ahead of its revenue

estimate to accommodate the fiscal relief measures. Therefore, the package can be accommodated without an increase in debt, especially borrowings from the market. As such, our fiscal strategy remains on track. The implementation of these relief measures will not result in a change in the debt trajectory and the fiscal deficit will not exceed the level presented in the February Budget. As a principle, the government will avoid financing any measures from an increase in market lending, and we have different options in this regard.

The package will include R5 billion in revenue measures, specifically an expansion of the Employment Tax Incentive (ETI) for four months. Over and above this, we are announcing payment deferrals for three months on Pay As You Earn (PAYE) for qualifying industries, as well as deferrals of excise duties on alcohol. These measures will be implemented from 1 August 2021. The Spending measures include:

A temporary re-introduction of the R350 Social Relief of Distress (SRD) grant until the end of the financial year, at a cost of R26.7 billion. The SRD grant will include support to child caregivers on an application basis. We want to make it clear that this is not a permanent social protection solution. Much work is still being done in this area, and additional borrowings to fund a consumption grant are not supported. Financial backing of SASRIA, currently of R3.9 billion, pending a regular assessment of the insurance payouts. This amount is a provision for a required capital injection should SASRIA exceed its limits. It may be revised as events unfold. Support to small businesses that are not covered by SASRIA will amount to R2.3 billion. These amounts are composed of reprioritisation of R1 billion and additions of R1.3 billion to the baselines of the Department of Trade, Industry and Competition and the Department of Small Business Development.

A further R950 million of additional funds will be allocated to the Police (R250 million) and the South African National Defence Force (SANDF) (R700 million). In addition to the above, the Unemployment Insurance Fund (UIF) has set aside R5.3 billion for the extension of the Covid-TERS coverage. This will mainly cover those who have lost their jobsduetothelockdowns.Withregardstothepeoplewholosttheirjobsdue to the recent unrest, the UIF will provide income support, using different instruments that it has at its disposal to deal with such eventualities. Other initiatives were aimed

at supporting economic reconstruction and recovery. These included among others the bounce-back scheme for small and medium enterprises (SMEs), public employment, and a 12-month extension of the R350 social relief of distress (SRD) grant. This will significantly affect the spending position for the 2022/2023 financial year.

Question

b) Discuss, in detail the impact of various actions (as contained in the passage) on aggregate demand (AD) and explain how consumption (C), investment (I) and government spending (G) were affected. [50 points]