As many in the country breathed a collective sigh of relief that Malusi Gigaba’s 2018 Budget speech was over, Steven Nathan, 10X Investments chief executive, said ordinary South Africans should be reflecting on a lot more than the number of bullets they think we have all managed to dodge.
As word started to spread that the Budget did not contain any depth charges and seems to have done a reasonable job of walking the line between prudence and populism, Nathan said the national predicament should serve as a warning to individuals to do better with their own affairs.
He said: “One risk is that we don’t identify all likely obligations, or don’t provide for them in good time. It’s all well and good servicing bank loans, but we should not lose sight of potential future outlays that relate to tertiary education, home maintenance or hospitalisation costs, for example.
“And of course, the biggest of them all: retirement! Unfortunately, it only takes a few years of neglect to turn a minor headache into a major emergency.”
Gigaba’s Budget, which was released in Parliament on Wednesday afternoon, included a 1% increase in VAT, the first since 2003. A hike of 2% had been widely expected after failing to materialise for a number of years despite being widely predicted.
Raising VAT – which effects all consumers, not just high income earners – was seen as extremely politically sensitive. Some said it was unavoidable with the national deficit having ballooned under the almost two terms of former President Jacob Zuma; others said it would be political suicide for Cyril Ramaphosa, a successful and wealthy businessman, to deliver an increase in the first Budget under his watch.
Most G20 countries run a deficit. A modest shortfall, up to 2% is acceptable, even desirable. But it shouldn’t go far above that, or for too long. The European Union’s Stability and Growth Pact requires member states to stay below 3% of GDP. (South Africa will be well above that in 2018.)
As we know, any shortfall must be funded, preferably through savings but inevitably through debt. While that resolves the immediate problem, it creates a bigger one next year: lower interest income or higher interest payments.
Nathan said: “It then becomes a bit harder still to balance the books. After a few years of this, it becomes a lot harder. It’s a slippery slope, with a debt trap at the bottom.”
He added that South Africa is on that slope already: “Our debt to GDP ratio is projected at 55% for 2018/19, double the number of 2008. Some 11% of our budget will pay for interest for 2018-2019.
“The more we borrow from here on, the more expensive it will likely be. It threatens a negative feedback loop that stymies growth, curtails future tax revenues and eats more and more of our spend. At some extreme point we risk a debt default, and a major recession.”
So, yes, it is in the national interest that we turn this around but the multi-billion rand question is: How?
The 2018 Budget included various other tweaks and adjustments to the fuel levy and estate duty and the like and appears to have spread the pain between the wealthy and the masses.
But, said Nathan, the fiscal gymnastics should also be a timely reminder to everyone “to address deficits in good time, before they do lasting damage to our financial health”.
If SA was a business there would be tougher questions
If South Africa was a business or a household trying to balance its budget the team at the top would be asking some very pressing questions, says Nathan, pointing to Word Bank forecasts for global growth of 3.1% in 2018 and 4.5% for emerging markets, against expectations for growth of 1,1% in South Africa.
“We are barely profiting from the modest commodity boom currently underway. We need to grow at 2% pa at least, just to keep pace with population and employment growth.
“A business in a similar predicament would ask: Where has our model gone wrong? What competitive forces have overtaken us? Who is eating our supper? We need that critical introspection in South Africa.”
He says it is obvious that the country should not just keep following the path that led us here.
“That path has seen us antagonise trading partners, dissuade investment, feed corruption and loss-making SEOs, bleed skills, and slide down the rankings on competitiveness and education,” he says. “Higher taxes and onerous regulations have made us increasingly unappealing as an investment and employment destination.”
Nathan suggests taking a commercial perspective on our state’s finances in order to “refocus on our competences and invest in areas that serve the public good and promise a decent pay-back”.
He adds that we should discard those that don’t, which likely “means letting go of the many state-owned assets that are in fact liabilities”.
Nathan said the benefits of taking a commercial perspective would go far beyond unburdening our country’s cashflow and balance sheet. “It would also close avenues of corruption and end the excruciating games that dominate our headlines, thus freeing up the management time consumed by such power plays.”
In competent hands, he adds, these operations could make a positive contribution to the economy. “If not, they must be allowed to fail.”
On the revenue side, the least we should do is foster an accommodating environment, one that beckons foreign investors, retains skills and supports employment.
