Budget 2020: We are now in “injury time” – no 2nd chances

Finance Minister Tito Mboweni. FILE PHOTO: Phando Jikelo/African News Agency (ANA)

If Minister Tito Mboweni gets his way, we can expect him to table a necessarily restrictive – and therefore largely unpopular – budget speech on Wednesday (26 February) At the same time, it would be politically untenable to turn a blind eye to the very real predicament facing millions of South Africans – poverty, unemployment, and disillusionment. The notion of actually reducing government outlays on, for instance, education, social grants, and health care, is, in the circumstances, a ludicrous one.”

I foresee that when all is said and done, the minister’s budget speech will probably come in for a great deal of criticism from both friend and foe.

The simple budget arithmetic and the underlying conditions and unrealistic expectations are incompatible with one another. Things will first have to get worse for a while before they get better. But if the right strategic decisions are made with conviction and clarity of purpose and intent, 2020 might just be the year in which the seeds of a moderate recovery are planted. We should not allow our judgement of the country’s longer-term future to be entirely clouded by day-to-day failures and indiscretions.

Through a process of osmosis the South African economy is expected to be as listless as the global norm. In addition to the external forces, over which we have no control or influence, the Finance minister also has to contend with a number of self-imposed obstacles – often self-imposed – to growth and development.

Underpinning the current constraints in the domestic economy is the fact that South Africa has become a deficit nation. Government expenditure exceeds government revenue; imports of goods and services exceed exports of goods and services; household consumption expenditure exceeds household disposable income; and the demand for investment goods exceeds the availability of domestic savings. In short, gross domestic expenditure (GDE; aggregate demand) has been higher than gross domestic product (GDP; total output) for a number of years.

As a consequence; the household debt-to-disposable income ratio has been between 75% and 80% since 2007, compared to a long-term average of between 50% and 60% in the previous few decades; government debt is rushing towards 60% and beyond of GDP, compared to 28% in 2008; the ratio of foreign debt to GDP is 47%, compared to 19% in 2005; and fixed investment spending in 2018 exceeded gross domestic savings by almost 4.0% of GDP (in 2002, savings exceeded investment by a factor of 2% of GDP).

The overarching and cross-cutting implication of the growing indebtedness of ‘SA (Pty) Ltd’ is that the country lives in perpetual hope that its various deficits will be financed by non-residents, at an affordable cost. Until a decade ago this outcome was generally achieved, as foreign savers found the country to be sufficiently attractive to warrant a meaningful investment in shares, bonds, plant, equipment and other forms of direct investment.

But this might have been not so much a vote of confidence in South Africa, but rather a motion of no confidence in the short-term economic outlook then prevailing in the USA, Western Europe, and Japan. Today, investors are probably finding it more difficult to formulate good reasons for financing South Africa’s fiscal, household, foreign and savings deficits.

On reflection, as a result, South Africa’s relatively robust economic growth performance during the first few years of the 2000s was largely driven by consumer and investment spending, which, in turn, was accommodated by rapidly expanding debt. In fact, levels. The latter are not sustainable. in fact, the last few years have seen a modest decline in the share of household debt to disposable income as the households attempt to restore the integrity of their balance sheets. This has moderated the growth in consumer spending.

Government, however, has yet to follow suit. It is now in ‘injury time’; there are no more second chances. Although Moody’s has to date elected to retain South Africa’s sovereign debt investment status, the risks of a downgrade to junk bond status are real. There is particular concern among investors about the financial crisis being experienced by Eskom and other state-owned enterprises. As the government continues to bail them out, the mountain of debt continues to grow.

Should Moody’s decide to relegate South Africa’s government debt instruments to junk bond status the consequences will, not surprisingly, be negative, as this would mean a ‘full house’ – all three of the major credit rating agencies would have then given the government a stamp of disapproval.

To start off with, it will become more difficult and more expensive to secure new loans. Rising borrowing costs will be borne ultimately by tax payers and consumers, thereby suppressing consumer spending and economic growth. At the same time, the cost of living will probably rise at a faster rate. The exchange rate of the rate will possibly weaken more severely than would otherwise have been the case. Foreign investment sentiment will be negatively influenced. Social spending by government will be constrained, unemployment could rise, and the overall socio-economic state of the country would be compromised.

In these circumstances this year’s budget must show a serious and plausible intent to, at the very minimum, curb the accumulation of debt. This requires a marked narrowing of the budget deficit by restraining the growth in government spending and/or raising tax revenue. The former will compromise the well-being of the poorer members of society. Given the very low economic growth expectations, the chances of organic growth in tax revenue are slim; this means that government will only be able to generate higher revenue through (upward) adjustments to existing tax rates. The usual increase in ‘sin tax’ rates will not be sufficient.

The most efficient mechanism would be another one percentage point increase in the VAT rate, which could yield an additional R20bn. This idea will be met with insurmountable political resistance, even though the burden on the poor could be relieved by, for instance, raising social grants and/or expanding the range of essential goods that are taxed at 0%. Failing this, the brunt of the higher tax burden is bound to fall on the private sector – specifically through a lifting of the maximum marginal rates of tax on personal income, and possibly the introduction of a ‘wealth tax’. Higher corporate tax rates might also be considered.

Normally, one would expect a government to adopt a stimulatory fiscal stance during times of economic stagnation. Now, however, if anything, an austerity approach is called for, with consumers, the business sector, workers, and the unemployed paying the price for past fiscal recklessness, foolishness, and indiscretions.

Meanwhile, for President Ramaphosa the honeymoon period has exceeded its sell-by date – 2020 is the year for him to show his mettle in dealing firmly and decisively with the legacy of the previous leadership. Included here are:

– The restoration of the autonomy and integrity of our democratic institutions (e.g., the Public Protector, the NPA, the criminal justice system)
– Improving the country’s stock of social capital (trust, goodwill, shared values)
– Not just paying lip service to the notion of stamping out endemic corruption
– The rebooting of state-owned enterprises (SOEs) – not least of which Eskom

Tough decisions are called for, he says, with difficult trade-offs that have to be made (especially in trying to balance efficiency with equity), and immediate results are unlikely to materialise. And the challenges are exacerbated by the reality of factionalism within the ruling party. The cocktail of political turbulence is further fuelled by debates about land reform, the National Health Insurance programme, the chronically high unemployment rate, and pervasive inequality.

In addition, in this highly interconnected and integrated world, no country is immune to the impact of global forces. Thus, leaving aside any internal constraints, South Africa’s economic performance echoes that being experienced in most parts of the world.

Globally, especially in the USA and Western Europe, populist, nationalistic, protectionist, and anti-establishment sentiments will probably persist. While the long-awaited Brexit ‘divorce papers’ have, at last, been signed, the terms of the divorce have yet to be finalised. The impact on the UK and European economies (our largest trade partner) remains uncertain, although a net positive outcome for economic growth in the UK seems unlikely. Despite some tentative signs of rapprochement, trade relations between the world’s two largest and most influential economies (China and the USA) remain troubled.

All in all, world economic growth in 2020 will be uninspiring. Although the USA and Western Europe should manage to stave off a full-blown recession, the pace of economic activity in the more developed regions could be just as lacklustre as in 2019.

China will also be hard put to record an economic growth rate in excess of 6%, as the trade tension exerts its negative influence. Moreover, the reach and severity of the coronavirus remains, at this early stage, unclear. This jaded global economic performance will be mirrored in low inflation rates, raising the possibility of a general further softening of interest rates from already unprecedented lows.

We can also expect the implications of the Fourth Industrial Revolution to be at the forefront of numerous analyses of the future of work, while climate change, its effects, and mitigation strategies will be one of the most important geopolitical issues in 2020. In short, I wish to see the following being address at the 2020 Budget Speech:

– International investment community – Trimming the budget deficit; a decline in the government debt-to GDP ratio; guarantees that “the lights will stay on”, selling off/ rationalisation of state-owned enterprises (SOEs); policy consistency; restoration of institutional integrity and competence.
– Local “big business” – Fewer civil servants and/or wage freeze for civil servants; greater involvement of private sector; alleviation of corporate tax burden;
– Local “small business” – Slash red tape; tax breaks for small businesses; relax labour legislation.
– Organised labour – Job creation; no more retrenchments; higher minimum wages; 
– Disadvantaged/ poor/ unemployed South Africans – increased government spending on and expansion of social grant system; lowering of VAT rate; more spending on health care and education;
– Local middle-income consumers – Lower personal income tax rates; no more load-shedding; visible end of corruption; Rand exchange rate stops weakening

Each of the above responses is understandable from the isolated perspective of each individual stakeholder. But the responses are also, on the whole, diametrically opposed to each other and mutually exclusive.  At best, most of the hopes and expectations patently display a misunderstanding of the realities of either political expedience, or economic plausibility, or both.

Moreover, the annual budget speech is primarily an estimate of government revenue and expenditure over the next financial year, which may provide an indication of strategic economic directions via the spending priorities identified by the minister.

The budget speech can and should not be seen as the panacea to all our economic woes and maladies. This statement holds true even in the best of times. In some ways the South African economy is currently experiencing the worst of times, partly as a result of external forces, but more importantly, as a result of domestic constraints.

Professor Andre Roux is an economist at the University of Stellenbosch Business School (USB).