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Too many praise singers obscure SA’s fiscal reality

08 March 2021 Gareth Stokes

If one judges the 2021 National Budget speech solely on economists’ reviews, one could be excused for thinking that South Africa Inc is in robust health and under excellent political management. We have read countless articles and attended a handful of post-budget presentations during which government, National Treasury and Tito Mboweni, our minster of finance, were enthusiastically applauded for a job well done.

An example of this exuberance comes courtesy Johan Els, chief economist at Old Mutual Investment Group, who commented during the group’s Q1 2021 Media Briefing that the budget was a fiscal turning point which could, contingent upon successful wage negotiations, prove a big boost to business and consumer confidence. He used phrases like ‘business friendly’, ‘confidence boosting’ and ‘game changing’ to describe one of the best budgets he had attended in 45 years. 

Other praise singers included Moneyweb.co.za editor, Ryk van Niekerk, who called it an interesting budget, “not nearly as apocalyptic as expected”, and Anthea Gardiner, CEO at Cartisan Capital, who gushed: “It feels like government has finally understood what it takes to reboot an economy in dire straits, the minister said all the right things”. But such enthusiasm masks a number of unfortunate realities, not least that the budget’s laudable intentions frequently come unglued somewhere between conceptualisation and implementation. 

A slow grind against public debt

South Africa is not poised for a miraculous budget-induced turnaround; but rather set for a slow grind against ballooning public debt, spiralling debt servicing charges, slow economic growth and fewer alternatives than ever to claw its way back from the fiscal cliff. Raising revenue through higher taxation is seen as unwise in a country that already boasts corporate and individual tax levels among the highest in the world. In this context, government’s only choice is to reduce overall expenditure without removing too much money from critical infrastructure projects and social welfare commitments. To summarise… A few years ago our minister of finance could have played both the income and revenue card to narrow the budget deficit; today the only ace in the pack is labelled “reduce the public sector wage bill”. 

Jane and Joe average could be forgiven for thinking that South Africa’s economic malaise was due the coronavirus pandemic and lockdown. Nothing could be further from the truth. “The history of the South African economy has been one of a general decline over the last 15 years; what the Covid-19 crisis did was to massively exacerbate the severity of the downturn,” said Dr Jammine, chief economist at Econometrix. He was presenting to an Insure Talk webinar, held 26 February 2021. The domestic economy has suffered through three periods of recession in the decade preceding 2020. And our weakness entering pandemic does not translate into strength emerging from it. Case in point, the International Monetary Fund (IMF) growth forecast for South Africa during 2021 and 2022 is classic ‘bottom of the world tables’ stuff. 

Among the favourable developments in recent months is that the country’s tax revenue collection was less affected by last year’s lacklustre economic growth than previously predicted. Economists have offered various explanations for the unexpected windfall, including the resurgence in commodity prices and resultant upturn in mining sector profits and, ironically, the high level of wage inequality that persists in our society. Dr Jammine explained that personal income tax revenue collection remained resilient through crisis because high margin taxpayers were less affected by job losses than their mid and low-income peers. “Most of those who lost employment were working informally or in the lower income groups who contribute very little to the overall tax haul,” he said. The same argument explains why VAT collections remained resilient through lockdown, namely that just 18% of households account for 85% of consumption expenditure. 

Growth squeezed by structural impediments

The revenue shortfall experienced in the 2020/21 financial year is almost entirely due to the country’s lacklustre 2020 GDP growth, pencilled in at -7.2%. “We have seen an increase in the shortfall between what government spends and what it receives in the form of taxes as a result of the decline in economic growth,” said Dr Jammine. Government has been forced to borrow more to plug this shortfall, pushing the country’s debt-to-GDP ratio into the 80% to 90% range for the foreseeable future. At these levels we have to divert more of the budget to debt servicing and away from infrastructure and social spending. The situation is exacerbated by the interest rates payable on SA government debt being among the highest in the world. Countries like the US and UK can issue bonds at around 1% compared to the double-digit coupon from domestic government bonds. 

The structural impediments to South Africa’s economic growth have been repeated ad nauseum. Economists trot out a long list of concerns whenever they have the opportunity, including corruption and State Capture; mismanaged of State-owned Enterprises (SOEs); poor education outcomes; and policy uncertainty to name a few. “We have been inundated with policy uncertainty in areas like land expropriation without compensation, the nationalisation of the South African Reserve Bank and a potentially unaffordable health insurance scheme,” said Dr Jammine. He lamented that instead of embracing the private sector, government preferred bureaucracy and overregulation. These issues are linked to factionalism and ideological differences within the ruling party and Cabinet, with an ongoing struggle between individuals who believe in market-driven solutions and those who believe in central control. 

Avoiding the fiscal cliff will not be easy. Els observed that there was a lot of execution risks and additional risk around economic growth that could impact the budget implementation; but he remained bullish about short term economic growth prospects, offering a rebound forecast of 5% GDP growth in 2021 and an upward shift to 2% annual growth over the coming years. “Factors that will help growth include global economic support, the easing impact of Covid-19 from 2022 onwards, fiscal consolidation, continued improvement at Eskom, headway in the corruption fight, and improvement on a number of policy measures such as infrastructure, lowering the cost of doing business, market-friendly changes to SA’s investment regulations and facilitating regional trade,” he said. 

Public sector workers face seven lean years

The elephant in the room remains whether government will succeed in getting public sector unions to accept a 10% reduction in their members’ real remuneration over the next three years. “The fact is that our public servants are remunerated better than in almost any other country, with the exception of Denmark and Norway,” concluded Dr Jammine. “Until we reach a compact between government and public sector unions we are going to struggle to overcome our structural impediments”.

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