This article was first published by BrightRock. If Adrian Saville had to describe this year’s National Budget in one word, then his word of choice would be “dull” – but not in a bad way. Believing that the “dullness” of the Budget Speech brings predictability and stability; Saville also, on the other hand, believes that government is focusing on the wrong budget deficit. The blinding deficit that’s costing us an Nkandla every couple of days. – TR
By Dr Adrian Saville
Ahead of the reading of the National Budget, there was a concern in investment markets that our Minister of Finance, Nhlanhla Nene, would have to reach for aggressive solutions to fund a stubbornly high budget deficit.
The anticipated solutions included a much higher value-added tax (VAT) rate on luxury items, a super-tax on high income earners, a hike in the existing dividend tax, a higher tax rate on capital gains or an aggressive jump in the fuel levy.
Stepping back from the detail, this chatter could be distilled into two key questions ahead of the budget reading.
First, would Minister Nene announce higher taxes? And second, where would the tax revenue come from? The anxiety associated with these questions was compounded by a concern that because this was Minister Nene’s first budget, he might be vulnerable to novice mistakes or maiden errors.
Notwithstanding the agonising over how sensible our forecasts would be, or our careful attention to the finest details, the answers to the two questions posed above are self evident.
Firstly, unless the size of government shrinks, we can confidently anticipate taxes will roll higher year-in and year-out. Indeed, this is about as close to a racing certainty as we will ever get in forecasting outcomes in the uncertain world of economics. Secondly, tax revenue can come from only one source, namely, us. Ultimately, all taxes are paid by individuals, regardless of the form in which the tax revenue is raised.
That said, with the budget having now been read, we can add the much-needed missing detail to the two superficial answers given above.
To this end, the answers presented by Minister Nene to our two questions have been accompanied by a notable drop in the level of anxiety, as well as sighs of relief that the marginal tax rate on higher income earners will be raised by just one percentage point; the fuel levy will be taken higher, but in a manner that seems palatable; and VAT, corporate tax rates, dividend taxes and capital gains tax are untouched.
The best adjective I can come up with to describe this national budget is “dull”. Importantly, I write that as a compliment, because “dull” brings certainty and predictability, which is exactly what investors, businesses and citizens should hope for from all policy makers, not least of all finance ministers.
Ironically, then, as much as the revenue and spending makeup of the budget might be interpreted as “growth neutral”, the level-headedness with which the budget has been put together can also be interpreted as “pro growth” through its promotion of certainty and stability.
Either way, all put together, we now know that the national budget for the 2015/16 fiscal year points to a deficit of 3.9 percent of gross domestic product (GDP), which is in line with the figure for the 2014/15 fiscal year. Also, we anticipate this number could shrink to a more conservative 2.5 percent two years out, which points to astute management of South Africa’s fiscal policy.
However, as much as we can congratulate the Minister and National Treasury on the sensible approach to managing the tax burden, allocating spending and reigning in the budget deficit, I wonder how much any of this matters?
I think we’re focused on the wrong budget deficit. To explain, the South African government has allocated R265,7 billion to spending on education in the new fiscal year, which is the single biggest line item in our spending budget. Yet the quality of our education system ranks us in position 143 out of 144 countries in The Global Competitiveness Report for 2015. It’s hard to imagine a worse outcome, but we achieve this by ranking in position 144 out of 144 in the quality of our maths and science education system.
In a similar but different vein, whilst the budget speaks of fiscal support for Eskom, the electricity crisis that grips South Africa costs the economy an estimated one percent growth a year, or about R40 billion per annum. Put differently, this figure equates to lost activity of just over R100 million a day, which is the equivalent of “an Nkandla” every two-and-a-half days.
Thankfully, the South African economy can afford the financial deficit of the National Budget, what our economy and society cannot afford is another year of yawning deficits between government spending and state delivery.
* Dr Adrian Saville is Chief Strategist at Citadel Investment Services & Chief Investment Officer at Cannon Asset Managers
