Delivering more than promised
Talk about under-promising and over-delivering. Against all odds, finance minister Tito Mboweni managed to pull the proverbial rabbit out of the hat. Only time will tell how impressed we should be. And it may well be a make-or-break moment for President Cyril Ramaphosa, who has so far shown himself unwilling to face off with his allies in the union movement, important players behind his rise to the leadership of the ANC and eventually the country.
Going into Wednesday’s budget, expectations were low despite consensus, at least outside the ANC-led alliance, that something had to give and SA couldn’t keep going on the unsustainable route it’s been on with no economic growth and ballooning debt. The economics were never in doubt.
From below 25% when Trevor Manuel presented his last budget just over a decade ago, debt as a percentage of GDP has rocketed to over 60% as the government ramped up spending. Settlements dating back to the mid-2000s set spending on an unsustainable path that pushed public sector wages up by about 40% in real terms over the past 12 years. That trend continued even as SA failed to keep up with peer economies that started to recover as global central banks flooded the world economy with extra liquidity. In the eight years through to 2018, the economy showed average growth of just 1.8%, far from the levels that SA needs to deal with chronic unemployment and poverty.
With debt servicing costs set to exceed what the country spends on health within the next three years and the country facing more downgrades that would push up its borrowing costs further, the pressure to do something was proving irresistible.
Economists who ventured their views ahead of the speech were looking at taxation, driven by a consensus view that the really politically difficult decisions would again be delayed.
A VAT increase, which has only happened once in the democratic era, would not have been an easy sell but it was seen as more palatable politically than provoking unions on public sector wages.
Pleasantly surprising economists and investors — the rand reversed losses and bonds surged as Mboweni was speaking — will most likely prove to be the easiest part.
Cosatu has already indicated that it won’t take this lying down and its spokesperson was already talking about a potential strike. The Treasury itself has acknowledged that negotiations with labour are going to be tough.
Mboweni says he is confident that unions and the government will find each other “eventually”. No doubt about that. What the markets’ focus is going to be on is where they will meet.
Political noise over the next few days will go a long way to determining the level of credibility that investors should assign to the budget. How long before the anti-Ramaphosa brigade within the ANC start rubbishing it?
There was little to fault in the budget. Tax relief for hardpressed consumers was a surprise, though a welcome one. With taxation, the government has to always keep a balance between seeking to take more and the negative impact on the economy and compliance.
On the corporate side, one need not look further than the array of companies that have issued earnings reports in the past couple of weeks to see that businesses, big and small, are on their knees. Increasing tax on non-existent profit would, by definition, not generate any income. It is widely accepted that SA’s corporate tax rate, at 28%, is uncompetitive, not a productive strategy for a government and president that have made attracting foreign direct investment the centrepiece of their strategy.
What didn’t get attention in the reactions to the speech was the reduction in spending on services around housing, education infrastructure and health. Cosatu will have noticed, but most likely will make the wrong connection.
A runaway wage bill funded by borrowing simply cannot be defended morally. It simply means taxpayers will toil to pay fund managers instead of equipping hospitals and schools. The big unknown for investors and ratings companies is whether the execution will be forthcoming. It is now over to the president.