Budget previews are usually dry so I will attempt to keep this somewhat punchy. One of the key frameworks for me when considering budgets are simply that one has to separate what one thinks is a good idea and ‘should’ be done from the reality of what is most likely to ‘be’ done.

I did a piece on the MTBPS both pre and post in the links.

What has changed since then?

Well, for starters, the SA economy had a slightly better second half of 2020 than anticipated in the MTBPS and revenue collections appear to be better, specifically corporate taxes (CIT). This is possibly because the mining sector has had a great time as resource prices have rebounded strongly.

Was the MTBPS the ‘poison pill’ and could the main budget surprise on the upside? Possibly. But this glosses over the longer term structural issues which were present pre-pandemic and are in fact still exacerbated by the pandemic related downturn.

Firstly, the MTBPS was a significant revision to encapsulate the effects of the pandemic, mainly because the main budget in Feb last year did not take the effect of the pandemic and/or lockdowns into account. As such, when I speak of a revenue overrun on CIT, it is from the MTBPS estimate, although likely still down on the main budget number. The MTBPS estimate for the budget deficit was just over 10% so if revenue continues the current run rate, it may come in a little below a 10% deficit.

That said, a 10% deficit is still huge and largely on the back of the fact that SA’s deficit was at already elevated levels before the pandemic. The old saying of knowing who’s swimming naked when the tide goes out rings true. The pandemic was the tide going out and SA didn’t have its swimming trunks on.

The Wish list

Enough of the gripe. What do I wish would happen? Well firstly, the budget usually takes it cue from the president’s SONA and as indicated, the key focus areas are :

  • Defeat COVID
  • Accelerate recovery
  • Job creation and econ growth
  • Fight corruption

This is a noble wish list and certainly frames some of the policy priorities that SA faces. In order to do so, undoubtedly, vaccine roll outs will require large spend. These are estimated at between R10-20bn. For context though, this is less than was spent on bailing out SAA in the last year and a bit.

Accelerating recovery will require stimulus that protects the vulnerable and along these lines, I believe that stimulus checks directly into consumers pockets will be a good thing to consider since we are already in the trap of needing to spend money to keep the economy moving. The ‘bang for buck’ here is great as consumers will spend and the multiplier should be immediate and real.

This should feed into economic growth and while it’s a band aid, could buy some time for deeper reforms aimed at spurring growth and job creation. There’s a long list here and beyond the scope of this post.

Lastly, fight corruption. This should be the top of the list as corruption erodes the efficacy of state spend, it erodes the ability to roll out vaccines and it erodes any other policy initiative aimed at improving the lives of South Africans.

How do we pay for this?

Well firstly, corporate taxes are high relative to the rest of the world so I wouldn’t look at increasing these. Perhaps some innovative ways to consider flexible employment for new entrants with greater flexibility in the labour market would provide some positive impact in job creation.

Secondly, personal income tax is looking at a very thin tax base which bears the largest brunt of the tax bill. Marginal rates are high so I don’t think this is where the bang for buck lies. SA passed the top of the Laffer curve (additional revenue per % of tax increase) a while ago here and I think that tax increases may be detrimental to the overall tax take in this regard.

A much-mooted wealth tax has been spoken about but is administratively cumbersome and may also link into some of the vulnerability indicated in PIT above. Also bear in mind that ‘wealthy households’ may not be high income. They may be asset rich, cash flow poor retirees. Hardly a sustainable source of long-term revenue.

This leaves the lower hanging fruit. I have long said that VAT at 15% is low by international standards. The global average on sales taxes comes in a around 18%. Administratively, it would be easier than a new wealth tax and may even get some bump should stimulus measures indicated above take place. 3% more on VAT would go a long way in increasing the revenue take… but with the caveat that it still needs to be spent wisely. And by wisely I mean it should go toward narrowing the deficit, paying down the debt and stabilizing the debt spiral that SA finds itself in.

I prefer the VAT increase to the fuel levy increases SA has used in the past. Yes, the fuel levy is probably the easiest to administer and represents a veritable cash cow but it also affects the poorest the hardest (they spend the most on transport as a % of income). It is a regressive tax but while my wish list says they leave this alone, it will probably be too juicy to ignore for the fiscus.

How about the spending?

This is where I jump up and down shouting SOE’s, SOE’s, SOE’s (State Owned Enterprises). Or more like SIES (for non-SA readers, this is an utterance indicating disgust)!

SA has lavished many billions on failing state-owned enterprises in the name of protecting jobs and ‘strategic imperatives’. It is time to admit failure. The state has proven itself incapable of running many of these enterprises and should leave it to the private sector.

The consistent bailouts of loss-making entities all in the hope of turning them around with little end in sight, is merely supporting SOE employees at the cost of every other South African. That money can be better spend providing services and bringing the debt under control. This requires an ideological shift from certain centres of government away from ‘The State should control everything because the private sector is bad’ to ‘Lets truly partner to open up markets and address service delivery along with the private sector’.

If government is concerned about the ‘rapacious’ attitudes of business, they could consider regulated pricing in newly opened sectors, etc. However, if they are serious about creating jobs and liberating sovereign balance sheets while adequately using private sector balance sheets, what better way than opening up markets!

Yes, the private sector needs to make money but if they do, the state gets the corporate taxes! Win! Plus the upside is that service delivery may actually happen. Graft is not solely a public sector ill and undoubtedly, the private sector will need to be watched closely but lets build the capacity rather than languish in the current status quo.

Redeploy the freed up capital that was pumped into SOES into new infrastructure, healthcare and education projects.

Ok – so thats the wish list, what’s reality?

We will know tomorrow what’s in store. While I hope that National Treasury can pull the rabbit out the hat, I’ve been using that one for so long that I fear the rabbit has been turned to stew. Hope is not a strategy.

We will likely not see much movement on CIT, PIT or VAT. Fuel levies will probably go up as well as ‘sin’ taxes. Expenditure control is key but we will likely see this pushed out into the outer years again with the hope that growth rebounds. Again, hope is not a strategy.

If one does simplistic modelling on a low growth (current situation) or ‘medium growth’ scenario, it is still evident that SA’s debt trajectory DOES NOT improve. Debt to GDP is on track to 100% and beyond. If interest rates globally start to rise, this gets worse! Debt service already chews up around R1 for every R5 paid to the state and may get worse. The Debt overhang is real as I have spoken about for a long time and will need concerted effort to turn around.

It explains why the Credit Default Swap (CDS) on SA has risen. This is the cost of insuring against sovereign default. Many EM peers have seen their CDS’s fall recently while SA has been stubbornly stuck at just above 300bps.

I always say that investing is a marathon not a sprint. The same applies for turning around a sovereign’s fiscal affairs if not more so. The problem is that I am not sure if the guys in the race know that the starting gun has been fired a long time ago, the race is underway and I fear that SA isn’t at the starting line yet.

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