Supplementary Budget 2020

Daniel Silke | Budget 2020 will be more pain than gain

Daniel Silke
Daniel Silke

'Walking a tightrope', 'fine balancing act' and 'tough juggling performance' are well-worn phrases to describe the unenviable task that Finance Minister Tito Mboweni has in his attempts to snatch victory from the jaws of defeat in the 2020 Budget on Wednesday.

Indeed, South Africa once again awaits a showpiece event in its National Assembly amid a global and domestic environment increasingly obstacle-laden and unlikely to satisfy.

The major domestic problem for Minister Mboweni remains the same that his own president faced in the somewhat generic and platitudinous SONA address recently.

The inability of the governing ANC to provide clear and unambiguous policies that are at once socially and fiscally prudent whilst being market-friendly inhibits much of what Mr Mboweni can accomplish.

Similarly, the substantial capacity constraints within the broader state apparatus (and in particularly an SOE like Eskom) have yet to bear fruit.

There remains an elusive solutions-based approach to rising massive debt levels and the challenge of trimming state expenditure which only provides a backdrop of piecemeal patch-up jobs that at best can be sold politically within the broader Alliance while muddling through with taxpayers and the broader investment sector.

For Mboweni, the shackled policy environment in which he works clearly causes sleepless nights. Early hours tweets expressing extreme frustration with his own party are hardly the stuff to instil great confidence in what he can pull out of his hat.

Just last week, key Alliance partner Cosatu lambasted the Finance Minister for opening a broader philosophical debate on whether – in principle – state money should be used to bailout failing SOEs.

Similarly, given Mboweni's historic remarks on his desire to dispose of ailing SAA, just how far can he push matters where even the ANC now resists the cost-cutting measures of the Business Rescue practitioners? He can express frustration – within the relative comfort of his Twitter feed but just how much more can he do beyond social media?

All of this narrows the scope to act within the finance minister's operating environment.  

He has a state expenditure bill on salaries that is out of control. He presides over an increasingly flatlining economy which may well fall back into recession with almost daily power cuts regrettably "normalised" in recent weeks.

Mboweni has a rising debt-to-GDP conundrum where borrowing to service the country's debt is now the biggest single item of increasing government expenditure. He has a potential revenue shortfall in tax collection – particularly on the corporate tax the VAT sides.

And the Minister has an electorate suffering as their job and economic prospects decline amidst falling per-capita wealth and the severe constraints that unleashes. As if this is not enough, he has to position the economy in advance of a critical local-government election some 14 months away.

And, as if anyone needs reminding, Moody's can finally take away our investment grade rating pushing our borrowing costs higher and threatening more currency and equity market uncertainty.

Make no mistake, this is therefore something of a crossroads for not only Mboweni personally, but for the ANC as well.

The confluence of deteriorating economic forces combined with continued policy uncertainty over land expropriation, the NHI implementation and a tougher trade stance from the US, are all bearing down on South Africa's ruling elites.

Add to this the coronavirus and its potential to severely slow the pace of Chinese economic growth and potentially that of our other main trading partners and you have the makings of a perfect storm.

Spiralling

So, for Mboweni, the challenge will be to present a picture that government is in control over what could be a series of events spiralling well beyond the control even more efficient administrations.

There are two sides at play in defining strategy for Budget 2020. The fiscal framework is, perhaps the toughest. Structurally, we need to massively trim state expenditure – predominantly on public sector wages that are around a third of government expenditure. But it would now seem unlikely that any large-scale retrenchments other than lesser voluntary exit packages can be attempted. To attempt a ceiling on wage growth below CPI at a time when COSATU already have the knives out is similarly tough to accomplish.

So, where do the savings come from? Yes, we will see more cuts for ministerial salaries and perks – symbolically positive but of little major consequence in the broader scheme-of-things.

It would also be foolish to wield the baton of yet another VAT hike given that the previous 1% increase at a time of immense consumer pressure would further dampen consumption-leg growth and the demand for goods and services which still drives this economy.

High levels of household debt already in our system make it a precarious time for cash-strapped consumer and any VAT increase would clearly have its most adverse effects on the country's poor. If you wield the tax axe in our fragile state, you are likely to sink this economy even more rapidly.

Certainly, a host of other tax increases will once again be presented. Sin taxes and Capital Gains Taxes are relatively easy and politically defensible. As is allowing bracket-creep to tax individual taxpayers more without substantive tax-table changes. Politically, the ANC would be supportive of higher taxes on the wealthy although the country is already straddling a possible tax-revolt in this regard.

Politically unpalatable

Ultimately only a more radical approach would bear long-term fruit – all of which seems politically unpalatable for the governing ANC.

Unbundling a host of government departments and Ministries – far more than announced initially by President Ramaphosa would really send a message. Lowering corporate taxes to inject a degree of positivity into the business sector (and cement the President's investment drive) would also help.

Halting the forced subsidisation of corruption and mismanagement through indirect and personal tax burdens would assist even just in sentiment. A massive series of tax-breaks to private entities to invest in government agencies would remove some of the state burden on propping up ailing SOEs.

But government too has a responsibility to spend. There is renewed and welcome emphasis on plans to boost infrastructure spend and unlock opportunities for medium term job creation and productive growth as well.

Stimulating the "hard product" of the domestic economy whilst managing not to extract the limited oxygen left from the consumption side is the classic dilemma of many Finance Ministers – and will be the critical issue to watch on Wednesday too.

Finally, there are choices to be made. You can take the more populist line and tax the wealthy, but you risk undermining tax collection from an over-burdened and shrinking group. Or you can actually provide some sort of relief (or at least retain the status quo) to allow breathing space for more broader economic and policy reforms.

For Minister Mboweni and the Ramaphosa-faction, this Budget is politically charged like few seen in recent times. You can battle on incrementally with limited and politically safe tweaks, but ultimately the decline will not be arrested. While you might keep your political party relatively intact, any further economic collapse will in itself begin to pile the internal pressure within the ANC as the coffers finally run dry.

With limited leeway within his own party, it's tough to see how a maverick and astute Finance Minister like Mboweni can take his own party to the brink and keep them on-board. Certainly, his own President seems unable to do this currently making it even more unlikely.

Politically therefore, this Budget presents once again, the potential for important and historic shifts. Yet the realpolitik of South Africa suggests that just like the SONA speech, the 2020 Budget will require a different set of circumstances to emerge within the ANC before the toughest decisions can be made.

And that set of dynamics is only likely to play out internally within the governing party as we approach the ANC's National General Council in mid-year, the 2022 ANC National Elective Conference and then the critical 2024 national elections.

There may indeed be more pain than gain at least in the short-term while the politics of the ANC shifts and mutates – hopefully in a direction congruent with substantive reform.

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