Three serious, unbelievable numbers SA’s not complied with

Below are two out of many quotes from budget speeches that illustrate promises that did not materialise, or are about to be blasted into the over-promised – under-delivered orbit.

From the 2012 budget speech:

“South Africa’s finances are in good health. A budget deficit of 4.6% of GDP is projected in 2012/13. We plan to reduce the deficit to 3% of GDP in 2014/15, and public debt will stabilise at about 38% of GDP.”

From the 2014 budget speech:

Despite slower economic growth, the 2013/14 budget deficit is projected to be 4% of GDP, lower than projected in October. The deficit will narrow to 2.8%of GDP over the medium term, and net debt will stabilise at about 45% of GDP in 2016/17.

Above quotes come from previous budget speeches made by the current minister of finance. The problem is the expectations and reality did not meet.

Debt to GDP

For example, the net loan debt is now 44.7% of GDP; weaker growth will probably mean the proposed mark of 45% is as likely to be exceeded, as was the previous mark of 38% of GDP.

In fact, gross public debt as a percentage of GDP is already close to 49% and rising. This is the highest level of debt South Africa has ever had.

The forthcoming chart shows how gross government debt to GDP rises and as it does, government debt guarantees to State-owned entities (SOEs). Rating agencies have pointed out that once the debt and guarantees together are at 60% of GDP, this would place South Africa on, or further, a downgrade.

For example, the graph below excludes a further increase in guarantees to South African Airways, the SABC and, in all likelihood, others.

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Source: Economists.co.za

However, the other figures I believe will be watched closely relate to debt – specifically whether net debt will remain below 45% and gross debt below 50% – both as a percentage of GDP.

The debt to GDP number is probably the more technical number that analysts will watch – it’s not only a function of the deficit, but economic growth as measured by GDP.

The above happened despite higher tax to GDP ratios and de facto increases in personal income tax, due mainly to not making enough provision for inflation.

Budget deficit

This brings me to the second serious number – the actual deficit as a percentage of GDP. In 2015/16 the budget deficit came in at 4.1% despite earlier promises of a 3% deficit for that financial year. Currently, the budget is forecast to be 3.6% of GDP for the 2016/17 budget year, despite estimates of it being at 2.8%.

South African Reserve Bank data shows that the deficit is still unsustainably high. A deficit that is higher than the growth rate will, over time, mean that the debt burden of government will rise. As we know, growth in South Africa will not average 0.5% this year, so even a smaller deficit of below 3% will not help much.

The debt burden as stated above is already a problem and this number shows its future trend. Every year we promise to cut the deficit, raise taxes and cut spending.

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Source: Economists.co.za

Revenue vs expenditure

This brings me to the state of play between revenue and expenditure.

National government expenditure as a percentage of GDP is now well above 30% and will probably not head down. Add the expenditure of local governments that do not come from central government and the expenditure will be above 35% of GDP. That is as high as the case of advanced countries.

This is way above similarly-developed countries and it is certainly extremely high for the small tax base.

Revenue will not be talked about much now, but the sugar and carbon taxes are clearly a new way of collecting money from the few to give to the many. Certainly, in February we will see fuel and sin taxes rise.

I suspect that even now the government tax to GDP ratio will rise and the expenditure ratio will barely stabilise.

That R216 billion was paid in extra-high purchase prices says there must now be a way to cut this runaway expenditure by at least 4% of GDP. We can cut the deficit to zero and still have some extra money for education and medicine.

But we need a strong, no-extra treasury department for that.

So far almost all the effort to bring government’s runaway deficit under control has been made by raising taxes. Taxes as a percentage of GDP for just the central government, rose from under 23% of GDP to over 26% of GDP between 2010 and the beginning of 2016.

Expenditure as a percentage of GDP, which should also have been brought down to provide the other half of the reduction in the deficit, continued to rise from less than 28% to over 30%, as can be seen in the chart below.

If the minister does not institute harsh expenditure cuts now, then he never will. International commentators have told me so.

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Source: Economists.co.za

The third number is key to everything said above and for the rating agencies too. That is economic growth. The biggest weight in the rating methodology is the per capita GDP growth. In South Africa that has been very slow for about five years and in decline for the last three years.

Moreover, economic growth has disappointed in every year since 2014 and has been half- or less the rate that National Treasury forecasts.

Growth forecasts presented by National Treasury are no longer believed by most analysts. Everyone respects Treasury, but not so much its forecasts. As one official from an agency said – they talk a good (growth) story but the policies of the rest of government are not at all conducive for growth.

Any growth less than our population growth of 1.6% in the next three years will be a further nail in the downgrade coffin.

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