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Something for everyone in the latest budget

And what ‘magic’ might mean to a finance minister – Alexander Forbes chief economist Isaah Mhlanga.

FIFI PETERS: National Treasury announced that it expects the economy to grow at a slower pace in 2021 than its initial forecast owing to a number of disruptions to those initial forecasts, including the riots that we saw in July.

But the government also announced that it expects to be able to bring down its debt at a quicker pace than it had initially expected, using some of the windfall provided by higher tax collections this time around.

Let’s get the reaction from Isaah Mhlanga, the chief economist at Alexander Forbes. Isaah, a lot has been said about our being be able to deal with our debt at a quicker and a tougher pace than initially expected, and it’s generally been given a thumbs-up by a lot of the commentators. Just your initial take on this, as well as the budget at large?

ISAAH MHLANGA: Indeed Fifi, if we look in terms of tax revenues, that’s R180 billion more than the 2021 budget expected. But also there’s something for everyone; there’s something for corporates, and there’s something for the man or woman on the street.

The reduction in the corporate income tax from 28% to 27% is surely going to boost confidence in the corporate sector.

In the bigger schemes of the budget it’s not a significant amount – about R2.6 billion, which is offset by some other items – but it shows government’s intentions in line with what the president said in the Sona [State of the Nation Address], that business should be at the centre of providing economic growth in the country while government makes the environment conducive for businesses. This is one of those intentions [going] from words to implementation.

On the household side for the man or woman on the street today there is no change in the fuel levy or the Road Accident Fund [levy], for the first time since 1990. This is a significant rebate that consumers are going to get.

Also, if you look from an income-tax-bracket point of view, this is now fully adjusted for inflation, which means the 4.5% inflation that we saw last year is now the adjustment in terms of the income tax brackets. That is a significant relief of roughly R13 billion to households or to employees who are employed and paying taxes. That is a positive as well.

Overall I would give this [budget] an eight out of 10 rating, the remaining two [out of 10] representing the potential wage settlement risks that might come, because government says it will have to consider headcount reduction if it cannot agree with unions on what they have budgeted for.

But if we consider that 2024 is the national general elections, we are likely to have unions that are negotiating from a position of power rather than from a position of weakness.

FIFI PETERS: Just on the allocation to some struggling SOEs [state-owned enterprises] this time around, although the minister indicated that this government would be taking a tougher stance on financial help or bailouts, can you give us a sense on this R308 billion – who gets what, and as this government is talking about taking some SOEs off its balance sheet that are not commercially viable, which should go?

ISAAH MHLANGA: Look, Eskom continues to receive the lion’s share of SOE funding, and rightly so because if it fails South Africa fails, given Eskom’s dominance as far as the provision of electricity is concerned in the country. So it makes sense.

Essentially we could say we are caught between a rock and a hard place as far as Eskom is concerned. We are doomed if we continue to support it and it doesn’t turn around, but we are also doomed if we don’t support it; then load shedding continues.

As far as the other SOEs are concerned, the Land Bank receives some support, given that it’s also strategically quite important as far as the agricultural sector is concerned.

But other SOEs are not that strategic, particularly if you look at the likes of SAA. We already know the part privatisation that continues, with less support [given] to it [by the state]. Denel continues to get some support from the state – it’s strategically also important.

Those are the few SOEs that I think are worth mentioning.

The other ones National Treasury or government can consider selling off – or even taking part equity while inviting private players to come into play.

FIFI PETERS: I’m glad that you mentioned Eskom, because the minister also made mention of Eskom and its current level of debt. I think when last I checked it was around R392 billion or so. But he made reference to a portion of that entire debt pile that was considered ‘distressed debt’ – in fact going off his own script to say that that distressed debt would need a bit of magic to fund it. I found it quite peculiar, and I asked myself what ‘magic’ would mean for a finance minister.

ISAAH MHLANGA: Look, as far as Eskom’s debt is concerned and the portion that is guaranteed by the state, we need to just have this realisation: Eskom’s guaranteed debt is South Africa’s debt.

At some point in time we have to take that debt and put it on the tax balance sheet and ease Eskom’s ability to go into the market and fund itself.

So perhaps that ‘magic’ would come from our getting a future overrun in tax revenues.

Then part of that tax revenue should be used to take part of Eskom’s debt and reduce that debt, to enable the SOE to operate at a more efficient rate.

I’m just guessing that is the magic that he is intending to do.

He says that for now –  given that it still has to be worked through the books of Eskom, but also through the National Treasury or the country’s balance sheet.

FIFI PETERS: I’m glad that you’ve even posed that question in terms of ‘if we get revenue overruns again’ in the foreseeable future, because a lot has been said about the support that the mining sector has given us thus far. But how long will the mining or the commodities bonanza last? I don’t know. Perhaps you can just share your initial projections on how long you think such support will be forthcoming, and how long you think this economy will continue to present tax overruns.

ISAAH MHLANGA: Look, that’s one of the big uncertainties. Remember, this budget comes within a global backdrop where economic growth is moderating and, as a result, commodity prices that have supported the mining sector and the banking sector and the overall economy in general are expected to moderate.

Some say this is a commodity boom but, if we look at historical booms, this is not even nearly a commodity boom; the cyclical recovery is going to wane as we go along. The support that it has provided to SA’s economy is also going to reduce; to what extent remains to be seen.

But what we can really be certain about is that it is bad fiscal policy to budget on a revenue source that is not permanent, that you cannot control.

That’s where the big risk comes from. National Treasury cannot budget on the basis of commodity prices because we do not control them; that global factor can change at any time. As a result, it might lead us into committing to overspending without the underlying revenue that is going to be used to fund it.

FIFI PETERS: Yeah, Isaah, I agree with you there, 100%. You did say there was a little for everyone in this budget, and I’ve got questions around whether the little that was given to the private sector will be enough to allow it to play a greater role in driving economic recovery and growth such that we’re not dependent on things that are temporary like a commodities boom, or non-boom.

We’ll leave it there, sir. Isaah Mhlanga is the chief economist at Alexander Forbes.

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Budget 4.5 / 10.

Why? Unsustainable wage bill, SOE’s, donations to Cuba, BEE etc.

End of comments.

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