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Why the GFECRA raid is little more than putting lipstick on a pig

23 February 2024 Gareth Stokes

There is plenty of pig imagery that one might attach to South Africa’s 2024 National Budget beginning with the writer’s favourite: ‘putting lipstick on a pig’. The phrase is eloquently explained by Oxford Languages as informal slang for making superficial changes to something generally regarded with dislike or disfavour in a fruitless attempt to make it more appealing.

It turns out, dear reader, that government is obsessed with making its annual accounts prettier. This year’s superficial change, aimed at pulling the wool over your eyes, was achieved by applying a liberal layer of ‘easy money’ makeup in the form of R150 billion conjured up by National Treasury from the country’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA) over the next three years. 

The big surprise in National Budget 2024

The economists and politicians queuing up to comment on Finance Minister Enoch Godongwana’s latest budget speech can thank their stars that the GFECRA decision was taken because it has since become the major talking point in an otherwise dull, safe, election-sensitive affair. Most welcomed the decision to raid the contingency reserve account, though the jury was out on whether the funds would be spent efficiently. Dawie Roodt, Chief Economist at Efficient Group called the decision “interesting” before sharing some background on the account. 

“This is basically a reserve account linked to the [price fluctuations] of the gold and foreign currency reserves held at the South African Reserve Bank (SARB),” he said. “Entering 2024, this account had an unrealised profit of around R507 billion rand”. Roodt noted that the balance on the account belonged to the state before unknowingly supporting our ‘lipstick on a pig’ analogy. He said that the decision to transfer part of this account had saved both the Minister and the African National Congress (ANC) government, and that leaving R507 billion rand at the South African Reserve Bank made no sense, especially in an election year. 

STANLIB’s Head of Fixed Income, Victor Mphaphuli, said that the budget was “positive and well-liked” before explaining how the unrealised profits on the account would be applied to reduce South Africa’s debt burden. “The use of GFECRA has led to a reduction of borrowing requirements by around R196 billion rand when compared to the Medium Term Budget Policy Statement (MTBPS) made in November 2023; this has helped the government to lower the peak of the debt-to-GDP ratio from an expected 77.7% in 2025-26 to nearer 75%,” Mphaphuli said. Although broadly in agreement on the decision, his colleague was more circumspect. 

All fuelled up, but stuck on the wrong path

Kevin Lings, Chief Economist at STANLIB, questioned whether using the R150 billion windfall to offset debt was the best way to spend the sum. “My preference would be to see that money used to directly impact economic growth, particularly infrastructure development that will lead to an upliftment of the economy by allowing  companies to export better; to invest more; and to create more jobs,” Lings said. His view: reducing government debt is sensible with the caveat that the contributing causes of the current debt nightmare be addressed first. 

“There has not been a significant change in the composition of government expenditure, and it is that component that has got us into trouble; together with the fact that the economy has not been growing,” he said, before offering two reasons why government finances are in such a mess. First, the economy is not growing fast enough and therefore not generating enough revenue through taxation; and second, because government expenditure is narrowly targeted towards consumption such as public sector wages and social payments rather than investments in growth-enabling infrastructure. 

To restate, the economist said that decision to use the R150 billion to settle debt was positive, but that for the country to reap long-term benefits from this action it had to be “accompanied by other structural reforms that ultimately put the country in a better position, including lifting economic growth”. The writer’s main concern is that the strict agreement in place between National Treasury and the SARB re the use of the GFECRA cash to repay debt is easily subverted. After all, any step taken to reduce debt and the accompany interest payments just frees up cash to spend elsewhere. 

The trouble with cosmetic fixes

This was among the red flags raised by Roodt. “The Minister is not going to use [the entire R150 billion] to reduce debt; there are some expense items such as categories of civil servant salaries that are already going up, including for nurses and teachers,” he said. Sticking with our opening ‘lipstick on a pig’ analogy, Roodt confirmed that the application of this money ‘lipstick’ allowed government to report lower debt levels, and National Treasury to print fiscal numbers that seem reasonable, despite the underlying trend being to borrow more. The extra money is plastering over cracks; but the foundation remains askew. 

Unfortunately for South Africa’s long-suffering taxpayers, many of the country’s problems derive from the ‘pigs at a trough’ mindset that afflicts much of the public sector. Unlike your or my households, which have to respond dynamically to changes in income and productivity, government simply borrows or taxes more to match its unchecked expenses. “For 2023-24, government faces a revenue shortfall of R56 billion relative to what the Minister put forward in February 2023,” Lings said. “Much of that revenue shortfall was due to [lower than expected] corporate tax receipts”. There is little hope of an economic growth-backed turnaround in tax collections. 

Both Lings and Roodt warned that the Finance Minister’s GDP growth estimates for the coming three years were optimistic, and that even at these optimistic levels the growth was insufficient to address the country’s myriad economic and social issues. Per the budget, the current year will deliver 1.3% with 1.6% in 2024-25 and 1.8% in 2025-26. “The Minister is far too optimistic, and I do not see the economy growing faster than 1% in 2023-24,” Roodt said. “Even if we grow the economy at 2% it will not be nearly enough to make a dent in the poverty and unemployment problems”. 

Bad news for SA’s top taxpayers

According to Lings both the economy and government finances will remain under pressure for the next three years. And that will be hard to swallow for South Africa’s dwindling pool of personal income taxpayers. 

This pressure exhibits in their being “very little to talk about” insofar tax concessions in the 2024 budget. Among the key takeaways is that individuals will be squeezed for every penny to ensure that the growing pool of social grant recipients stay happy through the 2024 National Election, now set down for 29 May 2024. For example, the Minister made no adjustments to personal income tax levels to compensate for inflation. 

“Under normal circumstance, the government will adjust the tax thresholds to compensate for the negative effect of inflation, also called fiscal drag or bracket creep,” Lings said, adding that the decision would see personal income taxpayers chipping in R15 billion or so extra this year. Overall, middle and high income earners will feel as if their income has gone backwards, and that they are facing the bulk of the tax burden in South Africa, alone. The squeeze continued by the decision to leave medical tax credits unchanged, with the only good news being that VAT and the already-high fuel and road accident fund levies remained unchanged too. 

South Africa’s narrow tax base is cause for concern. In Efficient Group’s post-budget presentation, the financial services firm revealed that a mere 1.4% of taxpayers, totalling 197 866 individuals, chipped in 32% of the total personal income tax haul in 2022-23. And the top 19% of earners paid almost 90% of the total. Roodt ranted that South Africans were over-taxed and showed how despite recent tax increases, the country’s tax-to-GDP ratio remained relatively flat. “We increase tax rates without collecting much more money because the economy cannot carry the burden … many taxpayers are simply emigrating,” he said. Just Google Laffer’s Curve for an explainer. 

Lies, porky pies

There are many pig analogies to apply in the context of government interactions with taxpayers. This writer favours the Cockney slang ‘porky pies’ as a counter to the ‘rich are not doing their share’ mistruth that the country’s trusting citizens are so frequently sold. “The South African fiscus is the most redistributive fiscus in the world, few people do most of the paying, and a lot of people line up on the receiving side,” said Roodt. “When the Minister started his speech today [he conceded] that economists try to increase the size of the pie whereas politicians are tasked with redistributing it”. 

The problem dear reader, as Roodt concluded: “Government is very good at redistributing the pie; they are not very good at getting the pie bigger [and sadly] instead of growing, the pie is getting smaller”. His peer, Lings, took a more conciliatory stance, concluding that the latest budget would be “absorbed quite easily” in the financial markets. “There is not a lot that is going to concern or surprise investors; from here, the pressure remains on government to find a way to lift economic growth and to spend money more appropriately,” Lings concluded. “The only realistic option to achieve that is through private-public partnerships…”

Follow the writer on

LinkedIn: https://www.linkedin.com/in/gareth-stokes-media/

Twitter: @stokesmedia

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