You had to feel a little sorry for our newest finance minister when he presented the recent mini-budget. Stuck between “a rock and a hard place” with no room to manoeuvre. SA has literally hit its fiscal cliff with the budget deficit now expected to be 4.3% of GDP vs. a projected 3.1%. What happened?
Quite simply there is no growth, expected GDP growth has now been revised down from 1.3% to a measly 0.7% dragging projected tax revenue down with it. What is interesting to note is the fall in taxes collected per percentage GDP growth, which the minister referred to as tax buoyancy. Tax buoyancy is code for a slippage in tax collection i.e. a mini-tax revolt. Have taxes reached a level where taxpayers have decided to opt out?
There is a well document principle commonly known to as the Laffer curve, which states that increasing tax rates beyond a certain point results in lower tax collection, notwithstanding the higher rate of taxation. I somehow don’t think this will prevent our finance minister from trying his luck on this front, but any details on future tax increases was conveniently left out of the budget.
There was a lot of reference to growth, however once again very thin on any detail of how and where this growth will come from. The way you stimulate growth is to grow employment, but without confidence and fixed investment there will be no employment growth, in fact the opposite is more likely with further job losses on the cards.
There is another way to drive growth and that is through productivity. Productivity can come from technology, which requires investment and / or labour productivity through education and upskilling. Needless to say; on these two metrics our productivity is tanking and our GDP growth outlook looks poor.
If you cannot grow your income then you need to cut your expenses, right. No chance. Keep in mind the bulk of tax revenue is spent on government wages and social grants so very unlikely we will see any reduction here, more likely to increase ahead of inflation. The fastest growing expense item in the budget is the interest on debt, which is now consuming 15c of every rand in taxes collected. The concern is the cost of this debt, which is likely to spiral upwards if we are downgraded, thus consuming an even bigger portion of the pie, which means less for other critical services.
You can decide, which is the rock and which is the hard place, with income falling and expenses growing there is only one way-out and that is to borrow more money, which is not really a way-out. It is simply delaying the inevitable, you cannot live beyond your means forever, eventually your creditors will say no more and then the “chickens come home to roost”. The minister knows this having just bailed out SAA to the tune of R5.2 billion when the banks refused to roll-over SAA’s debt.
For now, Minister Gigaba seems to be playing a political game, unsure on who will be victorious come year-end he appears to be playing both sides by not showing his cards. As investors we must never forget that volatility although uncomfortable when it happens provides opportunities for successful long-term investing.