How can finance minister Pravin Gordhan get a B and still fail? Because the pass rate this time was an A. As a result of many years of failure, peaking on 9/12/15 with the sacking of then finance minister Nhlanhla Nene, we stand at the brink of a ratings downgrade to junk status. We are not poised on a knife’s edge, we are hanging on the knife’s edge by the tips of our fingers. It will hurt to pull us up now, but instead we are just hanging on a little longer until the knife cuts us off.
What was needed for an A?
An A is a distinction, for that you need a near perfect presentation. In our current situation we are between the proverbial rock and a very hard place. The ratings agencies (let’s call them ‘rats’ for short) were mostly concerned with two things, our high and rising government debt driven by the budget deficit and lack of economic growth to supply an inflow of capital to fund our external deficit.
This makes life difficult because if you increase taxes to reduce the budget deficit you automatically affect economic growth negatively. Lower growth over time will also reduce the tax revenue, especially VAT. Ideally government would like to stimulate economic growth in a near-recession environment by reducing taxes and spending more. But we have painted ourselves into a corner by not returning to a budget surplus soon after the 2009 financial crisis. How wonderful was it to run budget surpluses under Trevor Manual with growth rates close to 5%? Those were the days.
So, if increasing revenue by raising VAT is not a good option, how do you reduce the deficit? The only option is by cutting expenditure…drastically. The cabinet doubled under President Zuma and the government wage bill ballooned. Drastic cuts could have been made.
What would also have appeased the ‘rats’ is a firm announcement of the dreaded p word. Yes, if Pravin announced firm privatisation plans to reduce government debt, the ‘rats’ could have taken a breather. The capital received from privatisation would:
- Repay debt;
- Reduce the interest payable which is already the biggest expenditure item in the budget. Debt service costs is also the fastest growing spending category and will escalate in case of a downgrade by the Rats.
- Reduce the budget deficit.
- Allow more effective and efficient running by the private sector.
- Save taxpayer billions in bailouts for SOEs like SAA, Prasa and Eskom to name a few.
To recap, what was needed was a drastic cut in government expenditure and privatisation plans.
What did the budget provide on these two scores?
The expenditure announced was actually R12 billion more than announced in last year’s Medium Term Budget Policy Statement projection. ‘Rats’ expected at least some substantial budget cuts. Sorry, but the below inflation increases in cabinet salaries announced by President Zuma minutes before the speech does not cut it at all. The Western Cape government sets an example by flying economy class and taking cheaper cars than allowed. The ‘rats’ were looking for a substantial cut and were presented with an increase in expenditure. How can they now change their negative outlook to neutral?
Gordhan said emphatically that there were no privatisation plans, only small minority shares would be sold. It is like expecting a car, even a second-hand one, after promises have been made to you and getting a nice dinky toy car. Not enough by a mile or a marathon for that matter.
What getting less than a pass rate means
Bottom line – a soon to be announced ratings downgrade by the ‘rats’. For more on the consequences of a ratings downgrade, read the 11/12 Blog by iSayiTrade titled The Zuma Rubicon!
And what happened while he presented the budget to parliament? You don’t need to be an economist to interpret the reaction. For clarity on bonds, an increase in bond yields is equal to a decrease in price, obviously negative:
The rand spiked as investors sold:
*Gerhard Lampen is head of Sanlam iTrade, the online share trading platform of Sanlam Private Wealth.