Many years ago there was a world-famous South African-born economist who described this country as one that developed via “political disasters and economic windfalls”.
His name was Professor Cornelis Willem de Kiewiet and in 1941 he wrote a book about the country of his upbringing called ‘A History of South Africa, Social and Economic’.
De Kiewiet studied at Wits and after receiving his doctorate in economics at the age of 29, left for the USA where he eventually became the president of two top US universities, first Rochester and thereafter Cornell. In other words, he was nobody’s fool.
Even though this book was written more than 70 years ago, his description of SA remains very apt. As a country we’ve stumbled from one political disaster to another and almost every time, just when you think the country is down and out, something miraculous happens with its finances and our spirits soar for a while.
And over the years we’ve had many political disasters but also many economic windfalls. However, these economic windfalls were also used to paper over the consequences of the political disasters.
In the sixties, seventies and eighties the economic windfalls were primarily linked to gold, diamonds and platinum.
Our political luck changed with the release of Nelson Mandela in 1990, the unbanning of the ANC and the process which eventually led to the first general election in April 1994.
Since then it’s been a mixed bag. Mandela was followed by Thabo Mbeki in 1999 (disaster?) and thereafter by the “economic human wrecking ball”, the current president of the country Jacob Zuma, after Mbeki was “recalled” in 2007. A political disaster without question.
For a while, like under the previous regime, the full-scale effects of the political disasters were able to be concealed by the economic windfall of the commodity boom from about 2002 to 2007. During this time SA’s export earnings rose from about $43 billion to almost $98 billion.
Our balance of payments (BOP) was in great shape, the country was running a surplus on its BOP, government debt was declining and tax revenues were pouring into government’s coffers. Trevor Manual was hailed as a great finance minister but if truth be told, he was just plain lucky.
There was something of mini-economic windfall in the wake of the Great Financial Crisis of 2008 in the form of the so-called carry trade. The US Federal Reserve was cutting interest rates to shreds with its programmes of quantitative easing known as QE1, QE2 and Q3 and money poured into the country, boosting our stock market, our bond market and greatly easing the pain caused by the rising deficit on the BOP.
In or around 2011 both our economic and political fortunes started changing for the worse. Chinese demand for commodities started slowing down, the prices of gold, platinum, iron ore and chrome started declining and the rand headed south. In short, our finances were crumbling around us and by the middle of last year it became very clear that the South African Revenue Service (SARS) had also reached the limits of its tax collection capacity under the current tax laws.
The budget deficit has been stuck at between 5% and 6% of GDP for a number of years while government debt has increased from the low 20s in 2008 to around 27% currently.
By October last year Finance Minister Nhlanhla Nene couldn’t conceal the harsh reality any more: revenue collections were under severe strain and a huge fiscal gap was starting to open between forecast budgets and expected inflows, something in the order of R45 billion over the next three years.
There was no question amongst analysts and economists: taxes were heading higher, it was just a question as to where SARS was going to strike. Was it personal income taxes, VAT, corporate taxes or trusts and estate duties, or perhaps even a combination of all of them?
Professor Jannie Rossouw from the School of Economic and Business Sciences at Wits University has been beating the drum for a while about SA falling over a fiscal cliff as soon as 2026 if the current pace of government expenditure on salaries, wages and social grants continues at the same pace.
Naturally, no country falls over the fiscal cliff, it just increases taxes to provide for its spendthrift ways.
And lo and behold, out of the blue – as nobody foresaw this coming – the global oil price started plunging, from an average of $120 a barrel in June to levels below $50 a barrel this week. Talk about luck!
As a country this is an economic windfall off the scale. I’m sure that the officials at National Treasury, currently putting the final touches to the 2015/16 Budget, must be doing the cha-cha, the tango and the twist all at once as they calculate the financial relief just offered to South Africa out of the blue.
Bloomberg earlier this week published some statistics from Oxford Economics which calculated which countries will be the winners and losers in the wake of the spectacular collapse in the oil prices. The obvious losers are heavily indebted oil exports including Russia, Nigeria, Venezuela and Colombia. The winners are the oil importers including Indonesia, India and South Africa.
Oil at $40 a barrel compared with $88 a barrel over a period of a year will add almost 1.3% to our GDP numbers, according to Oxford Economics.
Fuel prices have dropped by almost 18%, more than R2, over the past three months and further declines can be expected if oil continues to fall and the rand keeps an even keel. This is great – already there is talk about consumers having more money in their pockets and how this will boost consumption expenditure.
Up the fuel levy
But is this not the time for some creative thinking about ways to increase tax collections without inflicting too much pain? I’m no politician but if I were I would seriously consider increasing – yes increasing – the fuel levy in next month’s budget by R1 per litre.
Increasing personal income tax, VAT or even corporate taxes would be damaging to economic morale, would depress economic activity and would probably lead to more tax evasion than there currently already is.
South Africa uses about 25 billion litres of petrol and fuel per annum, which would therefore mean an immediate injection of R25 billion per annum into government coffers in a manner that is cost efficient and almost invisible.
Politically there would be much less of an outcry from consumers as they would not be paying more for fuel, only saving a little less than they would have, had the full benefits of the lower oil prices been passed on. Government would only be plucking the goose’s new feathers, not the old ones.
It also would not be inflationary as it wouldn’t translate into higher fuel costs, as long as the current trend in oil prices continues, which it seems to be doing.
At the same time, were I in government, I would also scrap the e-toll system in one go and fund the building of new roads out of the additional income derived from the increased fuel levy.
In one go government will solve its pressing and immediate revenue problems and also get rid of the opposition against the e-tolls in Gauteng, a province it could lose in next year’s municipal election.
There is only one proviso however: it must not use this economic windfall to step back from its stated objective of reining in state expenditure.
Sometimes in life you don’t always have to be good, just a little lucky. As Gary Player is famous for saying: Luck counts.
As a country we have just got very, very lucky. Let’s not squander it.
*Magnus Heystek is an investment strategist at Brenthurst Wealth. He can be reached at firstname.lastname@example.org for ideas and suggestions.