25 February 2020
FMF 2020 Pre Budget Statement
The South African economy is in crisis and the annual budget, this year on 26 February, will provide the most important indication of whether the catastrophe will deepen. For almost a generation the standard refrain from commentators has been that the Minister faced tough challenges but did well under the circumstances. Typically, analysts report what tax rates will be, which although relevant, do not say anything substantial. Will we get more growth-boosting policies this time around? Will the 2020 budget indicate what are the real priorities of government?
How are we to judge whether the budget is good or bad? Some suggestions would be:
- Does the budget contain policies that will see South Africa turn the corner from stagnation to prosperity?
- Have Finance Minister Mboweni and President Ramaphosa adhered to their promises?
- Which ANC faction seems to be gaining the upper hand?
- What is the split between departments that deliver services and welfare spending and those that do not?
Crucial to the first point are actions which lead to high economic growth. Chief among these are a lower overall tax burden (as measured by Tax Freedom Day), and a lessening of the unsustainable national debt (as measured by the budget deficit). These were budgeted to be 6 May, and 4.5% of GDP (R242.7 billion) respectively last year.
Other pro-growth factors (that we can possibly assess from budget figures) are the reduction of suffocating regulation, and whether government delivers something of value for our taxes. A look at the proportion of funds allocated to welfare and regulatory related departments provides a crude indication as to which direction the government is heading. The welfare related departments are education, health, social spending, community development, protection services, the capital spending part of regulation and infrastructure, and art, culture, sport, science and innovation. All the other departments are counted as regulatory. In the 2019 budget, welfare departments got 85.8% of the funding and regulatory departments received 14.2%.
We also want to see a shift in spending from salaries to goods and services plus capital investment, to ensure that citizens see some return on tax spending. In the 2019 budget the Minister allocated 59.6% of spending to salaries. Furthermore, taxpayers need to see lower taxes on trade and less spending on public enterprises. Last year trade taxes were 1.13% of GDP (R61.3 billion) and public enterprises cost R293 million but every few years government bails out one or more state-owned enterprises with a special allocation of many billions of rand. In addition, recently the payroll costs have been taking up larger slices of public enterprise costs. We need to see whether any of the above figures get better or worse in the 2020/2021 budget.
It’s more difficult to come up with ways of using the budget to assess the second and third suggestions. The President and Minister of Finance’s planned policies are:
a) upgrade energy, telecommunications, transport and water infrastructures;
b) lower barriers to entry and address distorted patterns of ownership by increased competition and small business growth;
c) prioritise labour intensive growth, mainly via agriculture and services;
d) promote export competitiveness via cost cutting and leveraging regional opportunities.
Take note of any mention of these policies in the budget – particularly with regard to any compromises.
To some extent, the third suggestion will be answered by whether the Minister makes any mention of compromises to the President’s policies or to any anti-corruption measures, and whether he leans toward pro-growth measures, as outlined above.
These are the substantial questions Mboweni must answer for the information of South African taxpayers, investors and business.
Author Garth Zietsman is an independent statistician.