The 2020 Budget tax and expenditure proposals are steps in the right direction for the SA economy. Holding the line on real government spending and avoiding a growth defeating increase in tax rates, is part of the right mix of policies.
The SA economy is hostage to fortune as well as to its economic policy proposals. Market reaction to the Corona virus overtook the Budget proposals that were initially well received in the market place. RSA 10 year bond yields were 8.76% p.a the day before the Budget on the 26th February and 60bp lower immediately on the Budget news. They were up to 9.1% on the 2nd March. They then declined to 8.76% on March 4th after the Fed in a Corona pre-empt, cut its benchmark rate by 50bp and US 10y Treasury Bond yields went below 1%
RSA bonds are not a safe-haven asset for investors inside and outside the country as are US Treasuries and the dollar itself. Yet were SA to be convincingly judged to be avoiding the debt trap and its money creation and inflationary dangers, taxpayers will gradually be rewarded with lower interest rates and interest expenses on their RSA debts. Global events that are now adversely affecting all EM borrowers and their currencies notwithstanding
The continued failures of the SA economy are elaborated upon in full grim even pious detail in the Budget Review. Some Treasury mea-culpa would however be entirely appropriate for what has gone so badly wrong on the Treasury watch. Most egregious was the failure to recognize and contain operating costs at Eskom. And earlier to have permitted the explosion of public sector employment benefits in the boom years after 2005. We could have done with a Sovereign Wealth Fund then, reinforced by successful BEE partnerships with it.
The Budget Review contains a broad reform agenda. Including most helpfully bringing the employment benefits of government employees back in line with “ .. the rest of the economy….” and promises legislation to “…eliminate excessive salaries and bonuses being awarded to executives and managers…” in the public sector that are indefensible. Eliminating the state’s “… complex and often ineffective procurement system. ….” is a reform long overdue. And the intended reform of the exchange control system to best OECD practice is especially welcome for the wealth friendly signals it emits. Undertaking the “…urgent regulatory reforms of the Ports …” would be a good step. But not only corporatizing the ports and cutting them loose from Transnet but allowing them to compete with each other for custom would be much better for the economy.
Staying well out, as intended, of the “….exports of intellectual property..” will greatly encourage the creation of IP. To “ Reduce the corporate tax rate” in line with the competition and eliminating many of the complex tax allowances is essential. It is these complications that are responsible for “…South Africa’s tax incentive system…” that “…favours incumbents and those able to afford specialist tax advice…”
Eliminating the extraordinarily large R600b liability for Third Party accidents of the Road Accident Fund (RAF) as was alluded to in the Budget Speech, would improve the State balance sheet. R2 per liter paid at the pump for the RAF could then be saved by households and businesses. Private insurance companies are more than capable of offering compulsory third-party cover at competitively determined rates. And capable of effectively contesting damage claims in court.
A debt for equity swap with Eskom debt holders is essential to the purpose of making it financially viable- otherwise a further R112b will be coming its way, on top of the R62b provided to date. And with no guarantees that operating results will improve.
Debt swaps on agreed terms that introduced influential private shareholders to help govern the company will make Eskom economically viable. It would reward its managers conditional on improvements in return on capital. And pay them well enough – which is the usual private sector method for adding economic value.
Wallowing in despair at the highly unsatisfactory economic condition of SA is not helpful. Past failures can be seen as providing much scope for improvement. Hopefully the Budget proposals can provide an upside surprise for the SA economy.