A new fiscal order may come beckoning
The national budget to be presented on Wednesday may well be the last under the full control of an ANC government. After the upcoming election it is likely that the party will need support from other parties to govern as part of a coalition and set budgets.
These parties are likely to have different, perhaps even better, ideas about taxes and government expenditure. Amazingly, they might even insist that continuing to award comparatively well-paid and cosseted public sector officials well above-inflation increases in their compensation is not the best way to utilise tax revenues; that employing more doctors, nurses, teachers and prosecutors who have been unable, for want of a large enough budget, to break into public sector employment, might be a far better idea than paying the establishment more.
They may understand that rising taxation rates are a major drag on economic growth, and that the country therefore cannot afford to increase government expenditure at the rate it has been over many years. This has resulted in a growing interest bill that crowds out other spending, threatens fiscal sustainability and brings high borrowing costs.
The major threat to the budget outcome in 2024 has been a lack of revenue — a result of the weak economy and its negative effect on company earnings and taxes. Revenues are expected to fall about
R80bn below a year ago — a miss of about 4%. Weaker prices for our metal and mineral exports have dragged on mining revenues and earnings. It will all mean more borrowing, perhaps also some drawing down on Treasury cash and foreign exchange reserves to reduce debt issuance. But this will only paper over the cracks.
Higher tax rates will seem counterproductive, and expenditure growth will have to be constrained, even in an election year. The opposite must be argued — that the economy has suffered from too much unproductive government spending, and hence too heavy a burden of taxes.
Ever since the recession of 2009, government spending and tax collected at national level have grown at a rapid clip
— ahead of inflation and nominal GDP, with the growth in expenditure being slightly faster than the growth in revenues, and the consistent shortfalls made up with much extra borrowing.
Up to a point you can describe it as conservative budgeting. This may be necessary in the circumstances, but surely economic policy must hope to do better than slowly strangling an economy. Being a re-elected government demands no less.
If we base our fiscal history on 2010 levels, national government expenditure is up 2.9 times, revenue up 2.8 times, compensation of public officials up 2.7 times, and interest paid 3.39 times higher, running at about R28bn a month.
This is a heavy price to pay for the mere right to borrow more. The consumer price index is up a mere two times since 2010, and the ratio of revenue to GDP is up from about 22% to 26%.
These are the unimpressive statistics that damage growth and make losing elections inevitable.
SA fiscal policy settings have been seen by investors in RSA bonds and bills as a slowmoving train wreck. They have demanded high interest rate premiums to overcome the risks to fiscal sustainability, which is undermined by slow growth and insufficiently restrained spending and taxing, and to satisfy their expectation that the rand will weaken consistently, and inflation stay at high levels and eat into their rand incomes in real or dollar equivalents.
It will take a different fiscal path to reverse such expectations and lift growth rates. In short, that is for government spending and revenues to grow no faster than the real economy.
Will the next SA government be able to grasp this nettle?
Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.