No cash for stimulus, but words will help
In the midst of the drama unfolding in the state capture and SA Revenue Service (Sars) commissions of inquiry, it’s understandable that the latest government financing data may have come and gone without much notice or commentary.
Facing competition from Themba Maseko’s testimony to the Zondo commission on what happened at the Government Communication and Information System and Bain & Co’s drilling at the Nugent commission, a report on one month of government revenue and expenditure was hardly going to be the centre of attention. It’s one of those releases that, though being among the most important in giving us a snapshot of where the economy is headed, doesn’t get the attention it deserves.
And in July it told a sorry tale, which has probably put paid to any prospect of President Cyril Ramaphosa delivering on his pledge of a new stimulus package, announced the same night he announced the ANC’s decision to seek to amend the constitution to make explicit the conditions under which expropriation of land without compensation can take place. That’s not to say there won’t be a token announcement one of these days.
Not that many people would have been holding their breath. What was apparently on the table, said to cost about R43bn, could hardly be described as remotely adequate given an unemployment rate that is near 30% and a contracting economy that is probably pushing that even higher.
It was nothing as ambitious as what was suggested by Business Day’s newest columnist, Duma Gqubule. Of course, one can question whether Gqubule’s remedies are wise or realistic in the light of the state of the economy and government finances.
The financing data came just a day after Treasury directorgeneral Dondo Mogajane and his deputy, Ismail Momoniat, told the Nugent commission how governance challenges at Sars had contributed to revenue shortfalls since about 2014, culminating in the first increase in VAT since the year before SA became a democracy as the government sought to plug a gap of about R50bn. This is unlikely to be a one-off.
While talk of credit downgrades has largely dissipated in recent months, the officials did flag the possibility that Sars’s compromised credibility could have farreaching consequences. “The current projected revenue shortfall is placing significant strain on the credibility of the projected path of fiscal consolidation and is likely to be a strong determinant in forthcoming ratings decisions,” the government announced.
If the decline isn’t arrested, the most significant consequence of a downgrade would be the country falling off investors’ portfolios, accelerating the sell-off of the nation’s bonds. That will translate into higher borrowing costs, meaning we’ll spend more money paying interest and less on providing muchneeded public services.
In July, the difference between what the government spent and what it collected reached R95.9bn — the most since at least 2004, Bloomberg data show. The main culprit was a drop in corporate tax, reflecting a poor economic performance so far in 2018 after GDP contracted more than 2% in the first quarter.
Second-quarter GDP numbers due this week will offer scant comfort. We probably managed to scrape through and record some positive numbers and will be able to congratulate ourselves on avoiding a technical recession, a decline in GDP in two consecutive quarters. That’ll be it and the outlook will remain rather gloomy.
One of the immediate consequences of the shortfalls is that in October finance minister Nhlanhla Nene will have to revise up the 2018-2019 budget deficit forecast from 3.6%. That always sounds academic but it does have reallife consequences, with interest payments gobbling up more of the nation’s wealth.
One of the more painful legacies of the Zuma period was a doubling of debt-servicing costs as a percentage of expenditure, and it doesn’t seem like we will be turning the tide anytime soon.
At least the public service did well out of it, constantly winning above-inflation wage settlements. It’s a pity the country can’t be said to have got value for money.
Nazmeera Moola, co-head of SA and Africa fixed income at Investec Asset Management, figured that the full-year budget deficit will probably be R10bnR30bn higher than anticipated, meaning there’s probably no room for additional stimulus. She also pointed out that revenue numbers may have been even less respectable had it not been for refunds to taxpayers falling behind relative to previous years.
That the economy is in need of some type of stimulus is not up for debate. Maybe we just need to move away from thinking of stimulus purely in rand terms. Ramaphosa may announce absolutely nothing and still achieve the stated goal if, for example, he made a go at improving the message around land reform, which has hurt investor confidence.
According to Investec calculations, uncertainty caused by the handling of this issue — the problem here is not the policy but the way it has been communicated — may shave as much as 0.5 percentage point off the growth rate in 2018. Coincidentally, that is the amount by which the Reserve Bank downgraded its 2018 growth forecast.
ONE OF THE MORE PAINFUL LEGACIES OF THE ZUMA PERIOD WAS A DOUBLING OF DEBT-SERVICING COSTS AS A PERCENTAGE OF EXPENDITURE