This is not an attempt to cover everything that happened in the budget speech today. The financial news agencies do a good enough job of that. Instead, I want to touch on some important concepts ahead of recording a Magic Markets podcast episode on this topic tonight. Look out for it on Thursday afternoon.
It’s hard not to allow some of the pop-culture terms in the market to enter your vocabulary. Brought into the limelight by the young army of traders on Reddit, the concept of having “diamond hands” means you have the strength and willpower to hang on through the dips and perhaps even keep buying when the price is high.
While this strategy is by no means a guarantee of success, it’s a positive term that they use for traders who have strong conviction. Being able to hold through downswings and keep buying is a function of the easy money that is all over the US. Unfortunately, the last thing we have down here is “easy money”, as South Africans work hard to survive in a country that taxes you twice.
The first tax is the official SARS rate. The second tax is the fact that government services are generally awful with limited exceptions, so you need private schools, hospitals and security anyway.
Nevertheless, Finance Minister Tito Mboweni has been relatively quiet on Twitter recently with his culinary habits. Famous for cooking chickens that look as appetising as the prospects of a tax hike, it’s probably better that way.
Speaking of tax hikes, we all expected the government to keep squeezing blood from the stone. Instead, the corporate tax rate was decreased from 28% to 27% and personal income tax brackets were improved i.e. the average tax rate for individuals will be lower in the coming year. I certainly didn’t see that coming.
The corporate tax improvement only happens from April 2022 onwards unfortunately. Patience, friends.
Credit rating agencies will like the fact that the budget deficit and debt-to-GDP forecasts have improved for the next three years. They will of course check those forecasts and arrive at their own conclusions. Hopefully, Tito can back up those numbers with a compelling argument.
Without doubt, the biggest risk in the numbers is the public sector wage bill.
Boosting tax revenues is also important, but the economic recovery and associated job creation should happen provided government doesn’t ban our beaches again in the middle of tourist season. A positive outlook for commodities is also great for South Africa as a mineral-rich country. I’m more confident about our tourism sector recovering than I am about a wage freeze in the public sector being successful.
While private sector employees faced salary freezes this year and in many cases retrenchments, the public sector employees had no such difficulties. Please don’t assume that public sector employees are all “gravy train” types stealing our money. In many cases, these are medical staff and teachers, the vast majority of whom are good people trying to get by in this world.
Unfortunately, their employer is our government which is facing a negative JAWS problem of epic proportions. I believe that JAWS is one of the most important analytical tools in investments and the same applies to assessing a country’s finances.
Simply, JAWS is the difference between the revenue growth rate (in this case tax collections) and the operating expenses growth rate (in this case fiscal expenditure). If revenue is growing 10% and expenses are growing 8%, you have positive JAWS as the operating margin is expanding (think of the crocodile jaws from maths at school). The inverse (expenses growth rate higher than revenue growth rate) is called negative JAWS and the operating margin is shrinking. In this case, the better analogy is JAWS the Great White Shark, about to eat someone and their entire boat in a Spielberg movie with special effects that haven’t aged well.
We are dealing with the shark variety of JAWS, yet Mboweni has still chosen to defend economic growth vs. the ANC ideology of endlessly creating jobs and growing a welfare class. He’s going to war on public sector wages and trying to help the private sector. We have enormous problems in our country’s finances, but our finance minister does appear to have Diamond Hands by withdrawing a proposed R40bn in tax increases for the next four years.
Maybe, just maybe, a commodities super cycle can make up for the lost decade that we all suffered. We do need some luck to go our way. We also need electricity.