A masterclass in budget commentary
The song that springs to mind when listening to recent posturing over South Africa’s short- to mid-term economic and political prospects was penned by Chris Rea, way back in 1989. Titled ‘The Road to Hell’ the song offers insights into the path South Africa finds itself on circa 2024. Rea sings about straying upon a motorway to hell, ending his ditty with a morbid couplet: “this ain’t no upwardly mobile freeway, oh no, this is the road to hell”.
‘Road to hell’ would have been great introduction to this year’s post National Budget presentation by Dawie Roodt, Chief Economist at Efficient Group; but the experienced economist opted for a somewhat more subdued ‘between bad and worse’ headline. No matter how you slice things, and regardless how the upcoming National Elections play out, you remain captive to a government that cannot ‘shake’ its three-headed fiscal challenge: local authorities; the national accounts; and state-owned enterprises (SOEs) are all in deep, deep financial trouble. The onward journey to National Budget ‘hell’ is paved with good intentions, as set out in the 2024 SONA.
The State of the Nation
The Organisation Undoing Tax Abuse (OUTA) took a principled decision not to watch President Cyril Ramaphosa’s State of the Nation Address (SONA) broadcast on 8 February; but this was not an option for economic commentators. According to Roodt, the latest address contained a long list of promises ranging from addressing poverty and unemployment; to fixing electricity, ports and rail infrastructure; to tackling crime, corruption and lacklustre economic growth; to implementing National Health Insurance (NHI); and giving the Social Relief of Distress (SRD) more permanence.
These election-skewed undertakings were made against the backdrop of a “horrible graph” of the South Africa’s per capita GDP going back 10-years. “Today our per capita GDP is three quarters of that of the average person, internationally,” Roodt said. “This measure started deteriorating in 2008, and since then the average South African has been getting poorer and poorer by the year and by the day”. This is not great news for FAnews readers, though it explains why your clients are struggling to stump up for higher fees for financial and risk advice, let alone find the cash for new insurance or investment products.
Making a case for anti-depressants
Those who ignored OUTA’s advice to skip SONA 2024, and who spent time afterwards reflecting on the facts the presentation contained, will have visited their GP immediately after, begging the doctor to up their antidepressant dosages. The chief economist uncovered one gloomy statistic after the next, from record-breaking levels of loadshedding in 2023; to the ever-expanding unemployment rate; to the rising mortality rate; to shocking math and science literacy levels, to name a few. “I do not believe we are going to see the end of loadshedding soon; looking at the data and trends it is clear that our electricity shortfall will become more of a fixed reality going forward,” Roodt said.
One after the other, he shot down the positive inflections in SONA, ending with this hard-to-swallow reference re crime. “The general crime level is exceptionally high domestically, and in recent year we have seen an ongoing increase in violent crime too,” he said, before concluding that the President was “taking a few chances if he reckoned things have been going better in South Africa”. On most measures, our beautiful country is deteriorating compared to our global peers. And even Sub-Saharan Africa, the poorest region in the world, is catching up.
The global context, politics and economics
Economic and investment analysts are keeping a close watch on myriad global events, most notably conflicts between Russia-Ukraine and Hamas-Israel. Roodt commented that the former war would progress unchecked unless Donald Trump was re-elected as President of the United States. He also warned that South Africa’s recent political posturing was not winning any favours in the West, and that government risked causing significant, lasting economic damage if it did not moderate its views. China, meanwhile, is “becoming more authoritarian [especially insofar] its intentions around Taiwan” while India is emerging “as the new rising star, globally”.
No economic commentary is complete without a whistlestop tour of global growth and inflation and interest rate outlooks. “Inflation seems to be drifting lower; interest rates seem to be coming lower as well; and the US is likely to start cutting interest rates,” Roodt said. As for economic growth, the US was seen powering ahead into 2024 compared with much of Europe already in recession, and the Chinese economy “really struggling”. Global economic growth was estimated at 2.5% for the coming 12-months; with the US at 1.6% or stronger; and China at 4.5%. The picture is far less rosy domestically.
Revisiting the country’s fiscal challenges, Roodt said we should lump local authorities, national accounts and SOEs together when calculating debt and deficits. It turns out the SOEs were in significant trouble entering 2024, with Eskom, South African Airways (SAA) and Transnet singled out for soaking up hundreds of billions in taxpayer-funded bailouts over the past decade. “A single Minister has caused more damage to our economy than any other,” complained Roodt, before mentioning a name familiar to FAnews readers. Just Google ‘SAA and Minister’ if you need a reminder. Aside from the well-documented debt challenges, South Africans face long-lasting issues in areas such as crime, corruption, education, healthcare and unemployment.
Roodt seemed somewhat sympathetic to the Finance Minister’s plight as he sketched the fiscal backdrop for the National Budget. “The economy is stagnant; you cannot tax the economy more because it simply cannot carry the additional tax burden,” he said, reminding readers of the Laffer curve. Per Wikipedia.org, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of a government’s tax revenue. It shows that past a point, higher taxes yield relatively less revenue. Another issue is that South Africa’s tax base is incredibly narrow; your clients and potential clients are among a shrinking minority who pay just about all the taxes in the country!
South Africa, an election year budget
Demands on the fiscus coupled with government’s inability to raise taxes set the scene for a populist budget. “This budget is about one thing and one thing only; it is about politics [and] the elections that will be held in South Africa on 29 May this year,” Roodt said. He commended the Finance Minister for his hard work to make the 2024 budget work, in what he described as an arduous smoke-and-mirrors process best-compared to “putting lipstick on a pig”. PS, you can read more about making national accounts look pretty in ‘Why the GFECRA raid is little more than putting lipstick on a pig’.
This newsletter concludes with a few of the less popular takeaways from the 2024 National Budget alongside some of Roodt’s comment on same:
- The country’s debt trajectory is unsustainable. “When you borrow long-term money and spend it on short-term, current expenditure, you destroy capital”.
- The Finance Minister’s repeated promises of austerity are being broken. “Over the years, state expenditure has been going up, and it is likely to keep on going up”.
- The country’s citizens are over-taxed, and we have reached the sticking point on the Laffer curve. “Despite tax increases in recent years, the country’s tax-to-GDP ratio remains relatively flat; we increase tax rates, but we do not get in much more money”.
- The current account deficit ‘printed’ for 2024-25 and 2025-26 seem optimistic, and are unlikely to be met, according to Roodt.
- And finally, the Finance Minister’s estimates for GDP growth are overstated, with Roodt countering with 0.6% for 2023-24 versus the budget’s 1.3%.
Commenting on the final bullet, Roodt concluded: “This is typical of what economists and politicians do: they tell us it will get better; but even if we grow the economy at 2% it is not close to enough to do something about the twin challenges of poverty and unemployment”.
Writer’s thoughts:
The lasting impression after reading this year’s SONA and National Budget is that South Africa is in deep, deep trouble. There is nothing on the economic, political or socioeconomic fronts that is trending in the right direction. Is South Africa Inc on a road to hell? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
