BRIAN KANTOR: Budget shows government is starting to get its policy mix right

The 2020 budget tax and expenditure proposals are steps in the right direction for the SA economy. Holding the line on real government spending and avoiding a growth-defeating increase in tax rates is part of the right mix of policies.

The SA economy is hostage to fortune as well as to its economic policy proposals. Market reaction to the coronavirus overtook the budget proposals, which were initially well received in the marketplace. RSA 10-year bond yields were 8.76% per annum the day before the budget and 60 basis points lower immediately after the budget news. They were up to 9.1% on March 2, declined to 8.76% on March 4 after the US Federal Reserve (Fed) cut its benchmark rate by 50 basis points to prevent coronavirus fallout — US 10-year Treasury bond yields dropped to 1%.

RSA bonds are not a safe-haven asset for investors inside and outside the country, whereas US Treasuries and the dollar itself are. Yet were SA to be convincingly judged to be avoiding the debt trap and its money creation and inflationary dangers, taxpayers would gradually be rewarded with lower interest rates and interest expenses on their SA debts. Global events that are now adversely affecting all emerging market borrowers and their currencies notwithstanding.

The continued failures of the SA economy are elaborated upon in full, even pious detail in the Budget Review. Some Treasury mea culpa would, however, be entirely appropriate for what has gone so badly wrong on its watch. Most egregious was the failure to recognise and contain operating costs at Eskom, and to permit the explosion of public sector employment benefits in the boom years after 2005. We could have done with a sovereign wealth fund then, reinforced by successful BEE partnerships.

The Budget Review contains a broad reform agenda, most helpfully bringing the employment benefits of government employees back in line with “the rest of the economy” and promising legislation to “eliminate excessive salaries and bonuses being awarded to executives and managers” in the public sector.

Eliminating the state’s “complex and often ineffective procurement system” is a long overdue reform. And the intended reform of the exchange control system to best OECD (Organisation for Economic Co-operation and Development) practice is especially welcome for the wealth-friendly signals it emits. Undertaking the “urgent regulatory reforms of the ports”, including  corporatising and cutting them loose from Transnet, would be a good step. And allowing them to compete with each other for custom would be even better for the economy.

Staying well out of the “exports of intellectual property” will greatly encourage the creation of such intellectual property. To “reduce the corporate tax rate” in line with the competition and eliminate many of the complex tax allowances is essential. It is these complications that are responsible for a “tax incentive system [that] favours incumbents and those able to afford specialist tax advice”.

Eliminating the extraordinarily large R600bn liability for third party accidents of the Road Accident Fund (RAF), as was alluded to in the budget speech, would improve the state’s balance sheet. Then R2 per litre paid at the pump for the RAF could be saved by households and businesses. Private insurance companies are more than capable of offering compulsory third-party cover at competitively determined rates. And capable of effectively contesting damage claims in court.

A debt for equity swap with Eskom debt holders is essential to make the utility financially viable, otherwise it will need a further R112bn on top of the R62bn provided by the state to date, with no guarantees that operating results will improve.

Debt swaps on agreed terms that introduce influential private shareholders to help govern the company would make Eskom economically viable. It could reward its managers conditional on improvements in return on capital, and pay them well enough — the usual private sector method for adding economic value.

Wallowing in despair at the highly unsatisfactory economic condition of SA is not helpful. Past failures can be seen as providing much scope for improvement. Hopefully the budget proposals will provide an upside surprise for the SA economy.

Correction: March 6 2020

A previous version of this article incorrectly said US 10-year Treasury bond yields dropped to 8.87%. The correct figure is 1%.

• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.