Budget: Expect a lengthy speech and little action

Mboweni must walk the tightrope between being right or popular, says Steven Nathan. ‘Sadly, doing the right thing is seldom popular’.

All eyes are on Finance Minister Tito Mboweni, who seems to find himself at the edge of a cliff with no room for manoeuvre as he makes his final preparations for the 2019 Budget speech on Wednesday. 

The pressures on our national purse are immense, from failing state-owned enterprises and municipalities to a bloated civil service, failing infrastructure and relentless service delivery demands. Tax revenues are expected to disappoint and push the budget deficit to almost 5% of GDP.

The traditional recourse is to borrow some more but, with our national debt on the brink of becoming unmanageable and unaffordable, that door is closing.   

Many things are rotten in the state of South Africa, and that flows through to our finances. It is a dire situation that requires drastic attention. There are two immediate options – raise revenue and/or reduce expenses – but they may not be financially sensible in the medium term. 

Hiking taxes may work in the very short term but is likely to reduce tax receipts over time. South Africa has a small number of individuals generating the bulk of personal income tax. It is risky to expect this small group to continue carrying this burden when it seems large chunks of government expenditure is consumed by corruption, fraud and waste. This applies to the corporate sector. In general, productive, capable people do not like pouring money down the drain forever. 

Hiking VAT again is completely off the table, politically, even if no one really registered last year’s increase (not even the inflation rate, which ended 2018 at a very benign 4.5%). Hiking personal tax rates would reduce consumption and that would flow through to lower economic growth, fewer jobs and lower corporate profits and taxes. 

It seems obvious, to me at least, that we must reduce government expenditure. On paper this seems easy. First reduce corruption, which should immediately eliminate billions of government expenditure. 

Reducing South Africa’s relatively bloated and expensive civil service and state-owned enterprises seems another fiscally obvious choice. But the challenge that Mboweni faces is that this is politically unattractive due to a potential backlash from unions as well as those who are benefitting from these inefficiencies. This is a pity since action in this area would send a hugely positive signal to business and foreign investors, and make them more likely to invest more in South Africa, create more jobs than are lost, and grow the economy and the tax base. 

Mboweni must walk the tightrope between being right or popular. Sadly, doing the right thing is seldom popular.

South African fiscal behaviour, measured by our budget deficit, has been irresponsible for many years. We spend far more than we earn, believing that some miracle will wipe out our ever-growing debt burden. Instead, we should implement sound fiscal management by balancing the budget. Stamping out corruption and wasteful expenditure would go a long way toward achieving this. 

There is no scope to push up company tax rates, not when we are trying to attract foreign investors. It’s also not realistic to squeeze more money out of our middle class, which, notoriously, pays amongst the highest direct and indirect taxes in the world.

Nor is Mboweni at all likely to announce significant cuts to state spending in an election year (or any other year, it seems). 

The trade unions – or alliance partners, as they are called before an election – are restless already after President Cyril Ramaphosa talked about breaking up Eskom (which triggered fears of privatisation) during his State of the Nation address earlier this month.   

Moody’s, the credit rating agency, is still undecided how this will play out. It appears reluctant to drop the sword on our investment grade rating, because condemning our local government debt to junk status could flatten the rand, ignite inflation and strangle our economy. But at some point, it may have no other choice.   

These financial times are indeed out of joint. “Oh, cursed spite, that ever I was born to set it right,” the minister may be excused for thinking, wallowing in some Shakespearean melancholy. Will he set about his task like Hamlet, by foisting a long speech on us and then do nothing?

We think he will.

Of course, he will propose cosmetic changes, apply the usual increases to sin taxes, and squeeze a bit more out of various levies. But he will find it near-impossible to make a bold play – such as a tax on retirement savings, for example, or prescribing retirement fund assets, or impose some other form of wealth tax – without incurring the wrath of the markets.  

Steven Nathan
Founder, Chief Executive (BCom, BAcc, CA (SA), CFA)

As the former Managing Director of Deutsche Bank in Johannesburg and London, Steven spent more than 10 years in equity research and corporate finance. He was consistently the top-rated Banks and Life Insurance analyst in South Africa, and was also voted best overall analyst in SA and EMEA (Emerging Europe, Middle East and Africa). During his time as Head of Research, the Deutsche Bank team was consistently rated no.1.

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