- There was a budget, then there wasn’t, then there were deliberations, and apparently, there are still some disagreements on how to balance the books come 12 March when the new budget needs to be presented.
- And the major stumbling block for all of these disagreements/discussions/deliberations was the proposed 13.3% hike in VAT. That of course is the simplistic view.
The reality of why the ANC wanted to increase VAT, like most problems, has a much longer history. And we need to go back all the way to the early 2000’s.
- For the early part of the 1st decade of the new millennium, the South African economy was actually doing very well.
- GDP growth was trending at around 5%. Unemployment was at around 15%, and South Africa’s debt to GDP ratio was in the low 20% range.
- I am old enough to recall that fund managers were actually unhappy at the small amount of SA government bonds that were being issued because they were battling to find assets to in which to deploy funds under management.
- The Rand was at around 6 to the USD and the Reserve Bank was able to take advantage of the positive sentiment to actively build the countries reserves thereby turning the Countries reserve from a deficit of around 20 billion dollars, built up during the apartheid years trying to defend the value of the currency, to a surplus of roughly 50 billion dollars.
- This all changed from 2007.
- In short, there was a change of leadership within the ANC, and a major shift in policy from a markets/growth (known as GEAR) strategy to a socialist type strategy.
- We do not need to unpack how this happened, the history is well documented.
- However, the consequences of this change in strategy can be seen in the numbers.
- Debt to GDP ratios have risen to 75%, largely as a consequence of multiple SOE bailouts, public sector wage increases and social grants.
- Growth has been stagnant, or negative in real terms when factoring in population growth.
- Unemployment has risen to 32% or even higher, and above 60% for the young people of the Country.
- Government has been borrowing more and more money every year and the interest servicing bill has now grown to one of the largest budget items.
- And taxes have already been increased on a number of occasions over last 2 decades.
- You may recall that last year Government also raided the so called GEFCRA balances at the Reserve Bank. (profits from the change in value of the Reserves of 50+ billion USD)
- And here we are – Government spending continues to grow. Revenues are not because the economy is not, and the demands on treasury require something to change.
- The market is saying you cannot borrow more (our debt ratings are already below Investment grade), and so the ANC’s solution was/is to raises taxes.
- Except now they do not hold a parliamentary majority anymore, and the opposition and GNU parties have said NO….No to further tax increases.
- And herewith ends the history lesson as we have arrived at a budgeting impasse. An impasse that in theory has to be resolved before March 12.
- The ANC does not want to decrease spending, The GNU partners don’t want to increase taxes, and the non-GNU opposition parties want more socialism paid for by the “rich” through taxes, but not VAT.
- Throw in NHI expenses, more wage demands from the unions, and the small matter of a 100 billion “development fund” and it’s not difficult to see that the rubber has hit the potholed road and something needs to be done.
- OH, and let’s not forget that we seem to have landed ourselves in Trump's bad books as well.
- So, what is to be done? To borrow from Rogers and Hammerstein, “How do you solve a problem like Maria?”. (Money and revenue in attrition)
- I know what I would do, but I am not the President – and the President did not take me up on my offer to become the Minister of Money. Refer to 18 November 2024 comment.
But I do want to use 2 recent global examples of poor policy and what happens when a sovereign is required to reset and choose a new direction.
- The first is Turkey, and what happened to the currency once a new direction was required.
- The Turkey President (still in power) believed that high interest rates led to high/er inflation. And so, he interfered with the Central Banks independence by appointing Governors who did not increase interest rates even as inflation was rising significantly.
- This lead to pressure on the currency and the Turkish central Bank depleted foreign currency reserves trying to defend the currency. When it all unraveled, the Central Bank was forced to hike interest rates from around 10% to well above 40% and the currency fell from around 7.5 lira to the USD to 35 and above in a short space of time. Wealth destruction impact on a grand scale.
- The other example is Argentina, the serial Sovereign defaulter because of socialist policy and poor currency management.
- In 2023, Javier Milei was elected on a radical right-wing mandate and promptly set about unwinding decades' worth of socialist policy.
- He cut 60% of government departments, reduced government spending substantially, and fired scores of government employees.
- In the last year inflation has fallen significantly, government revenues have stabilised and the budget is almost balanced.
- The flip side is that poverty and unemployment has increased because the private sector is yet to absorb all the excess labour. For that to happen the economy needs to grow.
- The point of using these examples is that at some juncture tough decisions need to be made. If you cannot borrow and you cannot increase taxes, then you need to cut spending and adjust policy choices. None of which the ANC wants to do.
- You can only kick the can down the road for so long, but at some point, you need to pay the bills.
- South Africa has run out of money, and in the absence of changing tack, has also run out of options.
- Much is at stake – perhaps even the structure of the GNU.
- 12 March is fast approaching.