Asked after the release of her group’s interim results last week whether she was concerned about SA’s delayed budget, FirstRand CEO Mary Vilakazi noted markets hadn’t moved much on the news. That there were tensions and negotiations within the government of national unity (GNU) could only be good for democracy, she said.
“What will be a good outcome is really whether it is a good budget in the end.” That meant fiscal discipline and an improving debt trajectory, she said. “That’s where possible improvements to our sovereign rating lie,” said Vilakazi.
Her sentiments are widely shared in the business and investor communities. Not only was the market unfazed by news of the unprecedented budget delay on February 19, but investors almost welcomed this evidence of democracy in action.
Crucially too, the one thing the GNU partners seemed to agree on was the need to stabilise the debt trajectory, even if they differed aggressively on how to get there. Despite the tensions within the coalition and within the ANC itself over taxing and spending, nobody seemed to suggest that the government should be borrowing its way out of its fiscal bind.
That is a hugely encouraging sign of the new government’s commitment to fiscal discipline. As encouraging will be if the latest, more democratic debate on the budget has yielded a compromise that the parties can live with. If it hasn’t, we are in trouble. One budget delay may be evidence of a functioning democracy. Another delay would suggest a dysfunctional and unstable coalition. And markets could react very badly to that.
The debt trajectory will be the bottom line the market is watching — and all SA’s citizens should be watching.
But let’s be hopeful. And let’s hope that the Treasury can craft a budget that convinces markets that SA can and will deliver on its oft-repeated promises to stabilise and eventually reduce the spiralling public debt burden. The Treasury will have had to work at speed to revise the fiscal framework and accompanying documents, not just to reflect whatever compromise the GNU partners have settled on, but also to factor in the effect of the recent, disappointing economic growth numbers. Budget Day 2.0 promises to be interesting.
The debt trajectory will be the bottom line the market is watching — and all SA’s citizens should be watching. The debt to GDP ratio — the size of the public debt relative to the size of the economy — has risen by nearly 30 percentage points over the past decade, to 76%. The cost of that debt now consumes almost 22% of the tax government collects. That crowds out more important spending on social and economic development and raises the cost of borrowing across the economy, weighing on investment and growth.
The February 19 budget that was not tabled envisaged that the government would run growing primary budget surpluses (revenue minus spending excluding interest) that would enable the public debt to stabilise at a peak of 76.1% in the next fiscal year before starting, gradually, to decline.
This week’s budget cannot risk looking worse than that. Ideally it will look better. The question is how it gets there, given that the GNU has rejected the two percentage point VAT rate hike that finance minister Enoch Godongwana was relying on to fund the R173bn he proposed to add to spending, mainly on frontline services in education, healthcare and security, as well as on the social relief of distress grant and higher than budgeted public sector pay.
There were good arguments for turning to VAT, rather than to further hikes in personal or corporate income taxes that would weigh heavily on savings, investment and competitiveness, especially given that SA’s income tax burden is already high by emerging market standards. And further extensions to the already extensive zero rating package would have helped to mitigate the impact on the poor. But two percentage points is clearly not happening. The half to three-quarter percentage point hikes being rumoured will be burdensome for retailers and banks that have to change their systems without returning that much revenue for the government. But at least they keep the VAT option on the table.
Crucially though, part of the opposition to the tax increase was a protest against unchecked spending increases. And though it’s hard to argue against much-needed spending on teachers, doctors and nurses, any tax increase should not provide licence for the government to keep upping spending — without making hard decisions about cutting wasteful managerial posts that consume resources that should go to frontline workers, or programmes and public entities that consume resources without yielding the outcomes SA requires.
The hard budget decisions need to be made more democratically and openly in the new world of the GNU. But they need to be made. And the budget should be judged on that.
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