Ditch ailing SOEs and VAT for pharmaceuticals to help economy survive the virus – FMF

For heads of state, the outbreak of the coronavirus presents hard decisions between the potential to save lives or their countries’ economies. Some countries like Sweden have decided its economy and citizens will be okay if they do not restrict people’s movement – so ski slopes are open, restaurants full of customers and customers merrily shop in malls. It was a policy that the United Kingdom and the Netherlands briefly flirted before they decided on a lockdown as academics warned that they could face hundreds of thousands of deaths and overwhelmed healthcare systems. President Cyril Ramaphosa decided not to follow the European example but to look at China where early lockdown saved lives and enabled the country to open up its economy sooner. Ramaphosa also had to consider South Africa’s added dimension of millions of HIV and Tuberculosis patients who could have compromised immune systems and could be more susceptible to Covid-19. As the Swedes say, history will tell which approach was best. The Free Market Foundation says there are steps that the government could take now to help the economy survive Covid-19, including a VAT holiday for pharmaceutical products and a halt to large bailouts for state-owned enterprises. – Linda van Tilburg

Steps the government can take to help the economy survive Covid-19

By Jasson Urbach*

As the coronavirus continues to wreak havoc across the globe, SA inches closer to winter and the future looks bleak. There can be no good outcomes from here – the country faces a long winter of discontent.

This is a human tragedy of epic proportions, and an economic one too. Our only hope is to soften the blow by suppressing the disease and adopting proven economic policies that can rebuild the country and create the conditions for strong economic growth.

The SA economy has been in a deep, dark hole for several years. Before the coronavirus struck the economic forecast was woeful. The country is now firmly in an economic calamity. Many more people have lost their jobs, joining the ranks of the millions already unemployed.

Even if the measures to slow the spread of the virus prove successful in the short run, South Africans must be prepared for subsequent outbreaks of the disease, which will further dampen economic activity and retard economic recovery. The SA Reserve Bank’s “hail Mary” 100-basis-point rate cut was the proverbial Band-Aid on a patient with a chronic heart condition who has just lost a limb.

It will do little to reduce the need for immediate action or alter the underlying economic meltdown. The government ran out of fiscal space years ago thanks to its determined commitment to implement failed socialist policies. The harm done by these policies is compounded by more than a decade of fiscal mismanagement and overspending on a bloated state.

Redirecting funds from SOEs

It is scandalous that the government continues to bail out and subsidise state-owned entities (SOEs) that compete directly with private enterprises and consume billions of rand in taxpayer resources. This money could be used to directly assist the poor. It could purchase health-care services and products for them from privately competing companies to assist with the inevitable fallout from the coronavirus pandemic.

To assist patients in need of pharmaceutical drugs, the government should urgently repeal the single-exit price mechanism, that applies to all medicines supplied to the private healthcare sector. The single-exit price compels all manufacturers and importers to sell their products at the same price to all of their private sector customers, regardless of the size of the order. It also prohibits them from offering any discounts to private customers. Most worrying is that no pharmaceutical company may donate medicine to the private sector or sell medicine to a private company at a reduced price.

To increase access to desperately needed medicines the government must allow private organisations and charities to negotiate directly with pharmaceutical companies to obtain the required drugs at discounted prices. Such private organisations and charities have a good idea of what goods and services are required to meet the needs of patients.

The government should also urgently repeal VAT on pharmaceutical products and devices. If the objective is to have a healthy and productive population, it makes no sense to levy a highly regressive tax on medical supplies the purpose of which is purely to raise government revenue. VAT on medical supplies directly penalises the sickest and most vulnerable citizens.

Relief options for SMEs

Some large businesses will be able to cope in the short run without revenue, but small and medium-sized firms will not. The government should increase the corporate tax exemption threshold for these enterprises and allow them to temporarily stop their Unemployment Insurance Fund (UIF) payments to stem the jobs bloodbath and continue their operations. These are the enterprises that will, if allowed to, hire the largest percentage of the workforce in future.

The government should immediately put a stop to the extension of bargaining council agreements to third parties, to enable labour-intensive small firms to continue their operations. Bargaining council agreements are generally entered into between big business and big unions, which agree to set terms of employment that are acceptable to them but that are often too onerous for small businesses and their employees.

Small firms and their employees are not represented on bargaining councils and have no say at such meetings, yet with the support of big government they have the decisions of the bargaining councils imposed on them. Stopping the extension of bargaining council agreements to third parties will not disrupt the terms of the bargaining council agreement. If the government wants to address rising unemployment, it must amend the law now.

Covid-19 is a huge challenge to the whole world, but we are already seeing many countries discard outdated and damaging rules and regulations to cope with the crisis. SA should not miss the opportunity to do the same.

  • Jasson Urbach is Free Market Foundation Director & Head of the FMF’s Health Policy Unit.
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