Hum-budgetary… The four or so guesstimates that leave Budget 2023 exposed
The media has had a field day with Budget 2023, commending the Minister of Finance for doing ‘the best he could in difficult circumstances’ and going gaga over the occasional income tax concession, most notably the R15 000,00 rebate offered to individual taxpayers for solar panel installations in the 2023-24 tax season. Corporate commentary on the budget was upbeat too, as South Africa Inc remains unwilling to criticise government, even when such criticism is deserved and overdue. Fortunately, there are a handful of analysts, economists and market commentators who call it as they see it.
War, things could get ugly
Top of this list is chief economist for the Efficient Group, Dawie Roodt, who took to the virtual podium within hours of the Budget 2023 presentation to offer his assessment of the forecasts and estimates it contained. Roodt spent the first part of his talk unpacking the global economy, reflecting on China’s sabre-rattling over Taiwan; India’s emergence as a global superpower; the surprising resilience of the United States’ economy; and the year-long Russia-Ukraine war, among other issues. “I am quite concerned that the Russia-Ukraine conflict will escalate [and that it may] eventually draw other countries into the fray,” he said. “If this happens, things could start getting really ugly”.
The good news from the ‘scene setting’ section of the discussion was that inflation is showing signs of cooling, both globally and locally. “Interest rates could still go up a little bit further, especially in the United States, but we think the worst is probably behind us,” Roodt said. He lauded the United States as a “miracle economy” for its uncanny ability to weather the recent economic malaise, as evidenced by its unemployment rate being at the lowest level since the 1960s. Most analysts expect the US Federal Reserve to continue hiking interest rates until inflation comes down sharply or unemployment levels go up. Overall, the World Bank estimates around 1.7% for global economic growth in 2023, rising to 2.7% in 2024, with China exceeding 4% in both periods. As for inflation, Roodt warned that the ‘old normal’ of 2% inflation in large, developed economies was a thing of the past and that you can “expect global inflation at around about 4%” going forward.
Electricity and fuel prices problematic
South Africa posted a surprising 1.6% GDP growth in the third quarter of last year, though economists expect a contraction over the final quarter. “Domestic inflation is currently sitting at 6.9% [and it looks like] the worst of inflation is behind us,” said Roodt, though he warned of potential hiccups due to electricity and fuel price hikes. In this context, you can expect another 25-basis-point increase in the South African Reserve Bank (SARB) Repo rate to 7.5% early this year, before possible cuts in the second half. In quick succession, Roodt congratulated SARB governor Lesetja Kganyago for a job well done; lamented interest rates as a “blunt interest” in the fight against inflation; and opined that having high interest rates for a short period of time was way better than high inflation for a longer stretch.
It took a full 25-minutes for the presenter to turn his attention to the numbers contained in Budget 2023, but less than five seconds for the first guesstimate to be laid bare. “I have to criticise the Minister of Finance [for being] far too optimistic on the country’s medium-term economic growth forecasts,” Roodt said. The National Budget is based on 0.9% growth in 2023-24, rising to 1.5% and 1.8% in the next two periods. These figures contrast with the SARB’s latest leading indicator which suggests the economy could be heading for a recession, if not already in one. PS, the most up-to-date SARB estimate for 2023 GDP growth is close to zero, at just 0.3%.
Our reliance on Eskom is in decline
“This high GDP estimate means that the revenue figure used by the Minister of Finance is likely to come in below estimate [and] weak economic growth means the economy is not in a position to contribute much to the fiscus,” said Roodt. Not only will economic growth disappoint over the next couple of years, but South Africans will become significantly poorer on a per capita GDP measure. “We have been getting poorer relative to the rest of the world [since 1994] and are now slipping even further,” he said. An interesting chart comparing the country’s electricity production to GDP led to some unexpected, good news. It appears that the ongoing travails at the state-owned electricity supplier have forced citizens to use electricity more efficiently, resulting in productivity increases per unit of electricity consumed. The stats also show that consumers’ reliance on Eskom is declining.
Roodt’s analysis of the country’s current account exposed the second and third guesstimates that could present challenges for the Minister of Finance when he delivers Budget 2024 and later. The current account compares government revenue to government expenditure to show a surplus when government spends less than it collects, or a deficit when it overspends. As already explained, the revenue number, which becomes the second guesstimate, ends up being overstated over the medium-term due to inaccurate GDP forecasting and the likely ongoing decline in commodities prices. So, while the Minister expects 0.9%; 1.5% and 1.8% over the next three periods, it is more likely we will see 0%; 0.5% and less than 1%.
State expenditure is running amok
The third guesstimate stems from the Minister of Finance’s undertaking to rein in state expenditure, especially under the contentious public sector wages heading. How, mused Roodt, can the Minister pencil in a 3.3% increase in the wage bill when the unions are threatening a national shutdown for 12%. The bottom line is that the state is spending far too much money, running an expansionary rather than a restrictive budget, with interest on its debt soon to grow to be the second largest expenditure item. “The current debt trajectory is unsustainable,” said Roodt, during his comment on the country’s fiscal accounts. It is also worth noting that the Minister’s figures on state expenditure relative to the size of the economy are skewed by his optimistic growth estimates. Basically, the error in the GDP forecast brings a range of other important numbers into question.
You will have to allow the writer some leeway to uncover the fourth guesstimate, which he will label the myth of a lower tax burden. We did say four or so! Budget 2023 started out with the enthusiastic claim that government had heard, and was responding to, citizen’s concerns over high levels of personal income tax. At first glance the claim seems accurate; but upon closer inspection we find a declining pool of taxpayers being ‘tapped’ to pay for ever-inflating education, healthcare and social grant expenditures. “We have been seeing an increase in the tax burden in South Africa for many years,” said Roodt. “It will continue to happen [because] politicians like to spend a lot of money”. He joked that the promise by politicians that tax compliance meant everyone would pay less tax was a lie, and that the truth was that state expenditure would simply grow to accommodate higher tax receipts.
Two grant recipients for every taxpayer
The on-the-ground reality in South Africa is that every individual taxpayer now funds two grant recipients. And the promise that the number of grant recipients will reduce when the COVID-19 grant comes to an end seems moot. “The COVID grant has been extended until 2025-26, and we are sure it will be extended thereafter,” said Roodt, suggesting that it would possibly form the basis of the oft-mentioned Basic Income Grant. This writer reckons that most local taxpayers are in favour of social grants that help to alleviate absolute poverty, provided that these tax dues are not misspent. Our dream, a South Africa led by a government that truly serves its people, elevating economic growth and employment over cadre deployment and political patronage.
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