News > Commentary > Medium Term Budget 2018: It’s about the debt – everything else is details

By Russell Lamberti, Head Strategist: ETM Macro Advisors

As markets and businesses prepare for new finance minister Tito Mboweni’s medium term budget address this week, they do so with a sense of hope that President Ramaphosa’s new man can change South Africa’s fiscal fortunes. This, of course, is wishful thinking since the government’s budget is the net result of a whole state system of which Mboweni is merely a part, as well as impacted considerably by the wider global economy.

The government has run budget deficits larger than R100 billion every year since 2008, and it hasn’t mattered who the finance minister was. Trevor Manuel ran deficits, Pravin Gordhan ran deficits, Nhlanhla Nene ran deficits, Des van Rooyen even ran deficits for a weekend, then Pravin Gordhan kept running deficits, after which Malusi Gigaba ran deficits, and then Nene ran deficits again. Despite factional disputes within the ANC, the one thing the party can fully agree on is deficit spending. Tito Mboweni’s task, if he is to be genuinely transformative, is to use his position to advocate for substantial deficit reduction to below R100 billion on the way to balanced budgets.

This week Mboweni will put forward revenue and spending projections. If his plans don’t credibly show a way back below R100 billion deficits, then we will know the seriousness with which the ANC takes its mounting debt problem.

Mboweni: Committed to the NDR

Although the budget is about much more than one finance minister, to a large degree the budgeting process and communication around the budgeting process is subject to perceptions and the creation of a believable narrative. Mboweni will be expected to produce rhetoric that supposedly “calms investors’ fears.” Mboweni is a trusted public figure because he held office as the labour minister and Reserve Bank governor during a time before the full consequences of ANC-style socialism had manifested, as they did under SACP-led macro- and microeconomic policy during Zuma’s administration. Mboweni is associated with a cleaner, less corrupt ANC of the 90s and early 2000s.

But it is worth remembering that Mboweni is first and foremost an ANC man with a stated commitment to the National Democratic Revolution (NDR). The NDR is and has been the ANC’s meta-strategy for many decades now – a Soviet-modelled strategy of creating total state control over the economy and levers of social policy.

Mboweni advocates 40% nationalisation of mines over and above the Draconian state control already levied over that sector, with ‘free carry’ mining shares ceded to a ‘sovereign wealth fund’. He also advocates the creation of a state bank to allow the state to channel even more private sector savings into its plans and projects. Both plans would allow the state to amass tremendous financial power.

He is also quite clear that his intentions for a state bank are that it would have a full-fledged banking licence which would allow it not only to take deposits but also issue loans against fractional reserve backing to expand credit. This would have the potential to create harmful inflation and boom-bust cycles.

We also know from his various public tweets about land, that Mboweni subscribes to a view that the state should effectively own and control all land and allocate it how it best sees fit. This is a rather disturbing view, to say the least, and puts him broadly in Julius Malema’s EFF camp.

And Mboweni has tweeted publicly that fiscal policy must be used “strategically to transform the economy.”

An Economy Taxed to Death

We are left wondering just what all this will mean for tax policy? It is hard to see it meaning lower taxes, though Mboweni did say in an interview last week that he favoured a special tax dispensation for financial sector companies who operate in the Johannesburg CBD – but not in Sandton! Quite why promoting financial services in the Joburg CBD as a priority is anyone’s guess.

He also stated last week that government’s wage bill is too high. He’s of course correct. He said that reducing the public sector payroll would produce “savings” that could be channelled into public works projects. This will be met with applause from some quarters, but it still leaves huge question marks over his view on the budget deficit, while it also ignores the colossal waste of money, corruption and false economic benefits associated with public works and ‘infrastructure projects’. Perhaps more clarity will be forthcoming in his mini-budget address, but we doubt it.

One thing currently going in the finance minister’s favour is that tax revenues have been buoyant in 2018 despite the awful economic conditions. Or perhaps we should word this differently: VAT and other tax hikes in February seem to be working out quite well for the state, but not so much for the private sector.

In the chart below, tax revenues (thick dark grey line) have matched the budgeted forecasts made in February 2018 (thin green line) and moved decisively above the pedestrian 2015-2018 trend (thin blue line). Of course, this rising tax intake is having to work hard to keep up with rising spending (thick light blue line), and it’s not clear how sustainable tax revenue growth of this magnitude is given the weak domestic economy and slowing global growth. And this is to say nothing of reports of SARS’ e-filing system facing potential failure, which could hamper tax return filing and have an implication on revenue collection.

The point is, as of this week’s mini-budget, Mboweni has reasonably buoyant revenue growth to boast to the rating agencies. A budget deficit of around 3% of GDP, forecast to fall slightly below that in the coming years, will probably appease the investment community in the short term. When and how those forecasts meet reality in due course will be what really matters.

What to Focus on?

In some ways then, Mboweni’s first budget will probably go by without too much fuss. He’ll have some stories to tell that can be spun positively from the perspective of the finance ministry: rising taxes, SARS cleanout reform underway, and some cosmetic progress in cleaning out rotten SOEs.

Despite his quite plainly statist and socialist views, Mboweni is adept at using rhetoric to appease the various business and investment community stakeholders he needs to keep onside. He is very much in the mould of the ‘technocratic socialist’. In other words, Mboweni is part of the opposing ‘reformist’ group that runs counter to the Zuma administrations overt state looting. For this faction, led of course by the new state president Ramaphosa and minister of public enterprises Pravin Gordhan, the Zuma era represents an awful discrediting of the NDR and a threat to its legitimacy. The plan is to get the NDR “back on track” by restoring the organs of state that were gutted by looting and incompetence under Zuma. But the NDR still envisages a road toward ever more socialistic state control over South African society and the economy.

What should one look out for in assessing this week’s mini-budget?

  • Is there any explicit recognition of the intolerability of the budget deficit and a credible, significant plan to at least reduce it below R100 billion next fiscal year?
  • Is there likely to be further tax increases or tax relief? (the minister won’t announce firm tax proposals but may allude to tax policy for February 2019)
  • Is there a conservative appraisal of current tax revenue growth and a recognition that local and global economic forces may cause 2019 and 2020 revenue forecasts to be too optimistic?
  • Is any sort of SOE privatisation proposed?
  • Overall: Key to assessing the mini-budget is whether the Ramaphosa administration has any meaningful desire to reduce the size and scope of the state fundamentally. Every finance minister from Trevor Manuel to Malusi Gigaba has seen the state as the alpha and omega of economic and social life, and they’ve expressed this in the budget itself. Yes, Mboweni has only had a few days to acclimatise to the new job, but the ‘New Dawn’ administration has had eight months. If it can’t formulate a mini-budget that speaks to unshackling the private sector, reducing the tax burden, and reducing the deficit meaningfully, then we will know that reform is a mere illusion.
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