Can Mboweni save South Africa?
Literally minutes after I first posted this article, the headline broke that Finance Minister Tito Mboweni has asked for a postponement of the medium-term budget speech. He’s asked for a week’s delay but it’s still a really bad sign. We now wait and see whether the speech will be on October 21st as originally planned, or kicked out to October 28th.
It’s no wonder that Tito Mboweni has been trying to butter up his followers on Twitter by posting endless pictures of his fairly awful culinary efforts.
Hopefully the budget is more appealing than his roast chicken, but that’s unfortunately unlikely to be the case. There are only a handful of people left who can save this country and Mboweni is among the top names on the list.
Government will focus on top-line
When corporates talk about top-line growth, they are referring to sales. It’s the lifeblood of any company, but sales alone cannot make a company successful. If every sale is made at a loss, there’s only one eventual outcome.
For government, revenue is earned from taxes. South African taxpayers pay for the ANC to keep the lights on in South Africa. Ahem.
Politically, the country is on a knife’s edge. Even if we ignore the horrific events of recent weeks that almost point to risk of a civil war, the challenge is that the ANC needs populist policies to hang on to voters but needs business-friendly policies to keep receiving money.
It’s a tough balancing act that has gone the way of populist policies in recent years. That needs to change, but will the ANC have the appetite to do so at a time when the EFF has made an incredible comeback from obscurity?
By focusing on top-line tax revenue rather than expense cuts, the ANC will continue to squeeze blood from the taxpaying stones, while promising the world to voters.
We can partially thank Clicks for the renewed populist pressure that the government now finds itself under. The EFF is back and they will be all over this budget like a rash.
The journey to a failed state
There are strong voices in the market suggesting that South Africa could be a failed state by 2030. Fear sells and the voices suggest investing offshore as a solution, so take them from where they come. However, the reality on the ground really doesn’t look good.
Mboweni’s fight to “close the jaws of the hippopotamus” is going to be long and difficult. It’s made harder by political chaos in the ANC on any given day. Mboweni has flagged a fiscal crisis by 2024 / 2025. It could be sooner than that if things don’t change.
Load shedding and the public sector wage dispute
If government could just fix the basics, we stand a fighting chance.
Load shedding is a catastrophe. Every time the lights go out, so does the economy.
We are staring down the barrel of a few years of negative real growth, which means every South African gets poorer on average even if there is no population growth. With population growth around 1.5% every year, we absolutely cannot afford to have a shrinking economy.
Eskom’s nightmares have the potential to sink the entire country. Andre de Ruyter may have the most important job in South Africa right now.
The other key issue is the public sector wage bill. Top managers in government and SOEs earn ridiculous salaries that are out of line with international benchmarks published by the likes of the Organisation for Economic Co-Operation and Development (OECD).
If South Africa was a company, a s189 retrenchment process would be followed to get rid of half the managers and regrade the rest to earn in line with benchmarks.
If only South Africa was a company…
There are three certainties in life: death, taxes and increases in taxes
The government won’t cut spending enough (or at all), so you can be sure of an increase in taxes. It will be done in the usual undercover way over the next few years.
“Fiscal drag” is a favourite, where tax brackets aren’t increased in line with inflation. In practical terms, it means everyone’s average tax rate goes up.
Another staple is sin taxes. Government has already rejected the tobacco industry’s pleas for no increase in cigarette excise duty as the industry tries to recover from the ridiculous lockdown ban. Treasury wants to increase the excise duty from 40% to 41.4% of the retail selling price of the most popular brand.
It doesn’t sound like much, but South African consumers are a price-sensitive bunch. Either producers will have to absorb the increase or consumers will smoke less. Government claims that part of the increase is to curb smoking. The ANC really does hate cigarettes and apparently also hates tax revenue.
Fuel levies and estate taxes are other soft targets, but the real action will be in the form of a potential wealth tax which nails top income earners while we still have any left.
Remember what I said about populist policies? What could be more popular than Robinhood-style taxes that take from the rich and give to the poor?
The ANC needs to tread carefully. It’s all fun and games until the rich have all left the building, leaving behind an economy with many mouths to feed and no idea how to do it.
Any silver linings?
Yes, provided the ANC takes expenditure cuts seriously, we could still be ok.
If you’re trying to decide whether or not to emigrate, check out my most read article to-date which puts forward an objective way to think about the decision.
For now, I’m staying. Perhaps I’m crazy.