Budget 2020 is intent on managing expenditure – but can SA deliver?

This year’s budget speech was as positive as it could have been given the current economic climate.

It was never going to be likely that this budget would “fix” the country’s deteriorating debt metrics but would rather be about reigning in rampant government expenditure.

Finance Minister Tito Mboweni had little room to manoeuvre in this budget and had limited options in terms of how to increase revenue.

There’s a saying that you can’t tax a nation into prosperity. South Africans already face a heavy tax burden and, to all intents and purposes, have already reached the top of the Laffer curve.

The Laffer curve is an economic theory that shows the relationship between tax rates and the amount of tax revenue collected. The curve is used to prove the theory that cutting tax rates can sometimes increase tax revenue.

Treasury clearly agreed, maintaining that in the current economic environment additional tax hikes would have been counterproductive and slow down economic growth.

Reducing government expenditure was therefore the only viable alternative, albeit potentially politically unpopular.

Mboweni announced plans to cut expenditure by R261 billion over the next three years, including cutting R160 billion from the public sector wage bill.

Cuts on different government departments indicate that spending continues to be out of control.

The minister referenced the fact that growth in the public sector wage bill has crowded out spending on capital projects for future growth and items that are critical for service delivery. He added that the salaries of civil servants had grown 40% in real terms over the past 12 years “without equivalent increase in productivity”.

Arresting growth in the public sector wage bill will be encouraging although we do expect push back from trade unions.

What will be key to watch in the months ahead is whether the political will is in place to follow through on this politically sensitive issue.

In particular, will government be able to stay the course in the face of a backlash from the unions?

Some tax relief for individuals was announced along with an unchanged rate of corporate tax.

The minister said government would be looking to reduce corporate tax in the long term in order to allow businesses to become more competitive globally, although no detail on the timing was forthcoming.

I am encouraged by the additional R2.4 billion allocated to the National Prosecuting Authority, the Special Investigating Unit and Directorate for Priority Crime Investigation to fund about 800 investigators and 277 prosecutors.

These additional funds will be used to assist with clearing the backlog of cases, including those emanating from the Zondo Commission.

The bad news, however, is that South Africa’s debt won’t be stabilised any time soon. Revenue is expected to grow by 4.9% to R1.58 trillion while expenditure is forecasted to grow to R1.95 trillion. This leaves a consolidated budget deficit of R370.5 billion.

Gross national debt is projected to be R3.5 trillion, or 65.6% of GDP by the end of the 2020/21 fiscal year. The fact that this is the largest budget deficit – the difference between spending and revenue – the country has experienced in the last 28 years is very concerning. What is also of concern is that both debt and deficit metrics continue to overshoot previous government estimates, indicating that the deterioration is exceeding governments expectations.

One of the biggest challenge to the fiscus continues to be struggling state-owned entities. A total of R112 billion has been allocated to Eskom over the next three years while R16.4 billion has been allocated to South African Airways to settle the airline’s liabilities and interest.

However, the efficacy of additional bailouts are limited. South African Airways is a classic example of how little additional bailouts have achieved.

Of concern is the fact that the budget provided very little detail on plans around privatisation of state-owned enterprises or turnaround strategies to return them to profit. In particular, there was no discussion around how Eskom’s ballooning debt would be addressed.

Similarly, there was no prioritisation of strategic versus non-strategic state-owned enterprises.

Although the minister made no reference to Cosatu’s debt relief plan for Eskom during his budget speech, he did make mention of it during the media briefing preceding his speech, saying that while the Cosatu plan was not a bad one, he was more interested in a plan that included all pension plans.

What is of concern is that this sounds alarmingly close to the prescription of assets which would act as a further deterrent to personal savings and would be a very negative signal to investors.

Little detail was provided around the proposed state bank or the Sovereign Wealth Fund and no mention was made of National Health Insurance or how it would be funded – all topics that are government’s “big dream” items.

The new state bank, said the minister, would be launched as a retail bank operating on commercial principles, would be subject to the Banks Act and have “an appropriate capital structure and performance parameters on investments and loan impairments”.

The big question is how a state bank run on commercial principles will be capitalised.

The Sovereign Wealth Fund, said the minister, would be created with a target capital amount of R30 billion.

Where this funding will come from remains to be seen although the minister did suggest some possible funding sources including the proceeds of spectrum allocation, petroleum, gas or mineral rights royalties and the sale of non-core state assets.

The reality is that a sovereign wealth fund is only feasible if there is a major political shift around restructuring state-owned enterprises.

The extent to which a sovereign wealth fund could be invested and managed on a purely commercial rather than a political basis in South Africa given the current political climate is doubtful, particularly considering the past track record of other state owned entities.

Was the minister’s message of consolidation and reform enough to avert a ratings downgrade by Moody’s next month? While some positive signals were sent out I am not convinced they’re sufficient to avert a downgrade.

The reality is that South Africa cannot sustain high debt to GDP like countries with structurally low interest rates such as Japan and the United States.

Government expenditure is increasingly focused on social support and public sector bailouts, leaving little investment into infrastructure, education and healthcare.

Having said that, the rand reacted positively to the minister’s speech which indicates a nod from investment markets.

• Andrew Duvenage is the managing director for NFB Private Wealth Management

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