“There is little evidence from President Ramaphosa’s recent State of the Nation Address [Sona] or Minister Tito Mboweni’s 2021 Budget Speech the government is willing to move away from its prevailing ideology in order to implement the necessary structural reforms which would put the economy on a growth trajectory,” says Andrew Duvenage, managing director of NFB Private Wealth Management.
He believes that without these reforms, South Africa is headed for a sovereign debt crisis within the next four or five years. He thinks it will be a bitter pill to swallow should the ruling ANC need to approach the IMF with cap in hand.
Taxes in the budget
The tax relief in the budget was not unexpected, given that economic growth must be prioritised over any major tax adjustments. “It was also no surprise there was no increase in VAT given the poor state of the economy and most households’ constrained personal finances in the aftermath of the Covid-19 pandemic.”
He warns the reality is that South Africa is not going to be able to tax its way out of its debt situation.
“Unfortunately we have an inherently weak tax system. Poor economic growth over a sustained period has allowed the focus of tax collection to shift from corporates to a highly-concentrated personal income tax base.”
Duvenage says a tax hike was never a realistic option because South Africa has reached the Laffer curve, a curve used to describe the relationship between tax rates and tax revenue. Essentially, there is a point when increasing tax rates actually reduces tax revenue.
Lending to SOEs
“Despite the Treasury’s tough talk regarding bailouts for state-owned enterprises [SOEs] and given the dire state of our SOEs, there is the ever present risk SOEs will require more money. Ideologically, the government has not been decisive about unbundling or privatising SOEs, with the result that these organisations remain the proverbial albatross around the country’s neck.”
Civil service expenditure
Duvenage points out that there was a big focus on cutting expenditure.
“A significant element of this is the freeze on public sector wage increases for the next three years, a position which we knew going into this budget that the minister was unlikely to change his stance on. Had he buckled on this position it would have significantly weakened his position, particularly for negotiations around the next wage agreement period which kicks in soon.”
He says by standing firm Mboweni is allowing the court process to play out.
“It is possible that the court will rule against the minister and force government to honour the last year of the wage agreement, or that some kind of political compromise is reached in upcoming wage negotiations whereby a portion of the final year of the last agreement is paid and in return, the unions agree to accept lower wage increases going forward.”
A deteriorating economy
According to Duvenage there is no question the government’s debt trajectory remains a cause for concern, despite the recently reported so-called tax “over-collection” and short-term tail winds which have helped at the margin.
“South Africa’s debt situation remains alarming, despite the ‘improved’ revenue collection, there will still be a massive R200 billion shortfall.”
The better than anticipated revenue collection compared to October 2020, is a reflection of the opening up of the economy which allowed corporate tax of R40 billion and VAT receipts of R30 billion to be collected, combined with strength in the price of commodities.
Whether the government will be able to sustain this so-called over-collection will be largely dependent on economic growth, Duvenage says.
“Economic growth relies on the government finally implementing long-awaited structural reforms. The reality is structural impediments remain the biggest challenge to the economy achieving any level of growth.”
The energy conundrum
Duvenage says energy remains one of the most significant problems. “The private sector urgently needs to be more involved and while the government is making moves in the right direction, the pace is far slower than it should be.”
He says although the private sector is involved in the Independent Power Producers (IPP) space, the core issue of unbundling Eskom and whether there should be material privatisation remains a challenge given government ideology. That said, there has been progress on this front with the government expecting the unbundling of Eskom into three separate units to happen in December of this year and of next.
“If the government is to realise its goals for infrastructure investments, it will need to partner with the private sector to enable infrastructure projects to get off the ground. Although a number of projects are in the pipeline, implementation is slow and progress is sluggish at best. Fortunately there is some acknowledgment the government simply doesn’t have the means to do this on its own.”
Duvenage warns one of the biggest concerns with this budget and previous budgets is how expenditure is being cannibalised, with funds being diverted away from long-term economic capacity building expenditure as well as health, education and policing, for example, and refocused on consumption expenditure, including wages and social welfare.
“While this budget tries to find solutions to the country’s debt issues, diverting funds away from economic capacity building projects and other anti-growth cuts is not the answer, given that they will have a knock-on impact in terms of unemployment and further stifle the country’s growth prospects,” Duvenage says.