Another ‘kick the can down the road’ budget
South Africa’s 2020 Budget Speech has come and gone, leaving little else for economic and political commentators and financial ‘hacks’ to do but analyse its content and share our opinions thereon. You may infer from the title of this piece that this hack is unimpressed.
The uneasiness upon listening to the live broadcast has subsequently been fuelled by the inexplicable favourable acceptance of the budget by the mainstream commentariat. The accompanying screen shot, taken from moneyweb.co.za, confirms that various economists and journalists rate as ‘above average’ a budget that fails to address the current fiscal crisis while making only passing reference to costly (and possibly still un-costed) policy interventions such as National Health Insurance (NHI).
How can one award ‘top marks’ to a populist budget that balances shrinking revenues and spiralling debt with a cost-cutting pipedream? And (this perhaps a bit tongue in cheek) how can a budget that barely makes the grade achieve 6/10 in a country where 3/10 is considered a pass? The 2020 Budget Speech can be criticised for what it contains; but should be condemned for items it fails to mention.
An illusion of wellbeing
One of the main reasons the budget has been well received by the media is that it ‘gives back’ to individual taxpayers. Mboweni is praised for the ‘slightly higher than inflation’ adjustments to the taxation brackets to address ‘bracket creep’ despite the fact taxpayers are still behind the curve due to the inadequate relief given in the previous tax year. There is also much happiness about changes to the transfer duty on individual properties until factoring in the virtual standstill in the residential housing market due to concerns over property rights. Even the decision to leave VAT at 15% was lapped up by fawning taxpayers as of benefit to them; they viewed the decision as a concession in an environment where the consumption tax was almost certain to increase by 1%.
The main concern with Mboweni’s appeasing approach to individual taxpayers is that it creates an illusion of wellbeing. Who would blame Jane and Joe Average for feeling that the country’s finances are pm the rebound following their unexpected windfall? “Wow – Tito was able to sort out our fiscal difficulties and still had money available to reduce our tax burden,” they might say. But a brutal assessment of South Africa’s revenue collection versus debt servicing conundrum suggests that personal income tax and VAT should have been hiked this year – if only to avoid massive hikes two or three years hence. Instead Mboweni has pinned the nation’s hopes on his (and government’s) ability to squeeze R160 billion from the public wage sector over the next three years. Before you celebrate you may wish to reflect on the likelihood that Mboweni achieves the first step in this process, being a R48 billion ‘saving’ in the final year of a three-year wage agreement that is already in place.
Commentators should judge the 2020 Budget on the likelihood that government can deliver on the promised savings given its historic performance in cost-cutting and the aggressive posturing by trade unions in the days preceding the speech. They should be asking how government proposes cutting ‘spending programmes’ by R100 billion while achieving the myriad promised infrastructure improvements. Only then should they consider whether Moody’s will accept a three or five-year view of country finances that hinge entirely on promises of reduced state expenditure.
Sidestepping those elephants in the room
An analysis of the 2020 budget speech should also explore items conveniently left out of the text. The ‘elephant in the room’ is the NHI which it seems has still not been factored into the accounts. How, for example, do you reduce infrastructure costs when most existing healthcare facilities (already inadequate in terms of beds and staffing) are unable to meet the basic standards set for them to deliver services to an NHI? And how do you reduce government’s wage overheads when a cohort of staff – some estimate 70 000 – are needed just to administer the complex system. Add to this the thousands of doctors, nurses and medical professionals to deliver the promised ‘healthcare for all’ solution and the promised cost reductions soon evaporate.
Eskom was brushed over too aside from confirming that government would ‘sink’ R230 billion into the electricity sector over the following decade. It was unclear whether this included the R60 billion that was being freed up for Eskom and SAA out of the previously mentioned cost-cutting initiatives. It is worrying that Mboweni spent so little time on a SOE that represents 77,2% (almost R300 billion) of government’s total guarantee exposure. Another less costly unmentionable is the e-tolling programme implemented in Gauteng for improvements to the province’s road infrastructure upgrades, undertaken prior to the 2010 FIFA World Cup ™. That item – which has a sticker price running close to R20 billion – was not mentioned despite various political undertakings to provide clarity on the issue.
This vagueness, this inability to make critical decisions extends to initiatives such as a state-owned bank and sovereign wealth fund. The private sector questions the need for such institutions – government insists it will push ahead – and then sets off on a time-consuming path of investigating its options and writing legislation to make them possible.
South Africa has no need for a state-owned bank run on commercial principles. And a sovereign wealth fund makes sense in countries that run surpluses, not countries trying to recover from a consolidated budget deficit of 6,8% of GDP and gross national debt of 65,6% of GDP (for 2020-21). To hint at the motivation for these institutions one should reflect on where government goes for funding when its taxpayer resources dry up… Perhaps next time Eskom or SAA need funds ‘in a hurry’ they will be able to turn to the Development Bank, the new state bank or South Africa’s sovereign fund, leaving debt that technically derives from the state, nicely ring-fenced.
Great ideas detached from reality
Mboweni references seven fundamental pillars that will guide economic strategy in line with National Treasury’s ‘Towards an economic strategy for South Africa’ document. These points, with some observations and glaring questions, are shared in the following bullets:
Strengthening the macroeconomic framework to deliver certainty, transparency and lower borrowing costs: It could be argued that the macroeconomic framework to deliver the desired outcomes is already in place, with the major stumbling block to improved borrowing costs being policy uncertainty around property rights. Of far greater concern is that the clarification (or formalisation) of government’s stated position on critical issues like land and mineral resource ownership will result in upward spikes in debt servicing costs from today’s untenable levels.
Focusing spending on education, health and social development: Government’s attitude to spending on education, health and social development seems to echo that of then minister of health, Dr Aaron Motsoaledi. Motsoaledi seems to believe that something done for the greater social good (such as universal healthcare) should be implemented regardless of cost. Free education and healthcare are noble constructs that come unglued in an economy with high unemployment and relatively few taxpayers. And provision of such services is further hampered by porous borders which see migrants crossing over into South Africa to avail of these services. (Their right to do so has been confirmed by the local courts).
Modernising ‘network industries’ and restructuring our state-owned enterprises: If South Africa had a dollar for every time they were promised ‘restructured and efficient’ SOEs we would not have to worry about our national debt. What beggars belief is that given the historic performance at SOEs government still believes it is best positioned to unlock value by modernising industry. The promise of unlocking value (last year the ocean was our salvation) is oft-repeated in budgets, but seldom translates to jobs or growth.
Opening markets to trade with the rest of the continent: Africa has more trading blocs than this hack has fingers and toes. Lifting trade restrictions is net good; but the goal should be kept in mind. There is no guarantee that free trade will translate into GDP benefits in each of Africa’s 54 diverse country markets… It should also be noted that sub-Saharan Africa (excluding South Africa) is forecast to achieve 3,5% GDP growth this year despite being subject to similar trade restrictions.
Implementing a re-imagined industrial strategy: If you’re unsure what this catch-phrase means, you’re not alone. It’s right up there with government’s recent stated intention of creating hundreds of black industrialists – it sounds great, but it’s pure lip service to the restless masses. There are countless reasons for South Africa’s dismal showing in the industrial / manufacturing complex including Eskom (cost and reliability of electricity); labour factors (cost, flexibility and productivity of labour); government policy (ill-thought protection for both ailing and thriving industries); and global competition (build anything cheaper than China if you can) to name a few. A re-imagined industrial strategy will have to address each of these factors.
Lowering the cost of doing business: This is another obvious and well-received sentiment; but one wonders whether government understands business’ requirement in this regard. So, for example, Mboweni proudly announces: “The BIZPortal will provide a streamlined way to register a new business with the CIPC, SARS, the UIF and the Compensation Fund in one day”. That’s great; but the real concern is not with the once-off registration requirements but the ongoing annual and monthly commitments to each of these bodies. It can take days for an SMME to resolve an issue with SARS while interactions with the UIF and Compensation Fund are ponderous at best. And nothing is mentioned here about the greatest challenge to SMMEs, being the inflexibility of the country’s labour legislation.
Focusing on job-creating sectors, such as agriculture and tourism: These sectors of the economy already punch above their weight and will prove invaluable in the fight against unemployment given South Africa’s demographics. But an excessive focus on these sectors is counter intuitive… If the country hopes to make a meaningful dent in unemployment it will have to create jobs in sectors that bring it closer to the global economy and tie into another favourite catchphrase, ‘the fourth industrial revolution’. Government has much to answer for following countless poorly implemented job creation schemes that have caused more harm than good over the past decades. Need an example? Just look at the over staffing / productivity combination at any municipal office or SOE.
When viewed in isolation South Africa’s 2020 Budget weaves a story of a considerate government that secures tax relief for its citizens on the back of carefully managed state expenditure. The reality is that this budget creates a smokescreen for massive unresolved issues. It does not acknowledge the long term damage to the economy of allowing staff costs to ‘swamp’ departmental budgets. Nor does it explain how ballooning debts at Eskom and unchecked liabilities at the Road Accident Fund (among other financial crises) will be addressed. The biggest surprise post-budget would be if Moody’s decides not to downgrade the country’s sovereign credit rating in the coming months.