2019 Budget: An Election Budget That Will Still Manage to Keep Rating Agencies Happy and Business Optimistic

This 2019 Budget analysis does three things. First, it highlights announcements in the 2019 Budget, which relate to economic and business development. Secondly, it provides a critique of the budget content. Thirdly, it outlines ways in which I think economic growth should progress post-budget and post the 2019 General Election.

The 2019 Budget was a highly politicised and a Thuma-Mina (Send Me) affair, coming just 76 days before a General Election. The Finance Minister, Tito Mboweni was in a confident mood, painting a picture of improved macroeconomic policy outlook and growth, better economic governance; and of ‘Comeback Trevor Manual’s Days’.

However, the opposition have been quick to pour scorn on this notion, highlighting the failure to deliver on the all-important deficit reduction. Despite all the political rhetoric, it appears to me that this is another budget that will fail to bring about meaningful economic growth whilst addressing social inequality.

The Finance Minister argued that the economic outlook appears positive over the next three years. GDP growth for 2019 revised downward from 1.7% to 1.5% (2020:1.7%, 2021: 2.1%).

I would, however, argue something different. Like previous policy approaches during former President Mbeki’s era of economic growth, wealth creation usually comes at the expense of growing inequality in South Africa.

Even where jobs have been created, we have seen a proliferation of low skilled, part-time, and low paying jobs.

The Finance Minister has also continued the current government’s drive aimed at reducing the deficit of the public purse. Despite deep and sustained cuts in public expenditure since 2011, the financial position of the government is yet to improve. In 2019/20 Government will spend R 243 billion more than it earns (revenue of R 1.58 trillion and spending of R 1. 83 trillion). SA is borrowing R 1.2 billion each weekday with an interest expenditure of R 1 billion per day.

The idea of a ‘new dawn’ is looking a long way away in our poorest communities; who are disproportionately affected by low economic growth and high unemployment. The Finance Minister has taken the easy option and continued with the funding of the inefficient state-owned entities like Eskom, the SABC and SAA to drive the so-called developmental state. A more progressive budget would involve a far greater emphasis upon public-private partnership model, which would have sought to balance the developmental mandate of government and the commercial viability of the SOEs.

The Content of the 2019 Budget

The key themes of the budget are inclusive growth and radical economic transformation, essentially this is intended as a budget that will allow the economy to continue to grow and reward those who economically engage in this process. Large-scale investment projects have been scaled back since the last budget, although investment in the social cluster departments (education, health, social development) has been maintained.

The Economy

With inflation under control, interest rate will remain low making borrowing for businesses and entrepreneurs affordable. But most importantly as we have seen in the past, recessions are caused by significant rounds of interest hikes or by a shock to the economy – most recent the drought that we experienced, low commodity prices or financial volatility.

Over the two years, interest rates have increased at a very modest pace by historical standards. This is good news for business! It means there is no pressure on the South African Reserve Bank (SARB) to significantly boost interest rate to control inflation. The inflation rate is expected to go up to 5.4% in 2020 after remaining at 5.2% in 2019. This is still within the Reserve Bank inflation target bracket of 3% to 6%.

With no inflationary pressure, the Reserve Bank can continue to increase rate in keeping with the economy’s growth prospects. Currently the economy is gearing down, and the Reserve Bank has responded by slowing the pace of its rate hikes. The risk of sharply higher inflation is low, and therefore, we can expect rates to remain relatively stable. On this front, there is no reason to believe a recession is in the offering, which is good for business.

Employment and Skills

The 2018 Employment Tax Incentive (ETI) that is to be extended by 10 years was one of the Finance Minister’s key announcements in a country with unemployment rate above 27%. Eligible bands will be adjusted upwards from 1 March 2019. Employers will be able to claim the maximum value of R 1 000 per month for employees earning up to R 4 500 monthly, up from R 4 000 previously. The incentive value will taper to zero at the maximum monthly income of R 6 500.

The 2019 Budget will not live long in the memory. Although the Finance Minister largely avoided the temptation to dole out freebies with an election looming, neither did he produce any headlining policies to stimulate the economy. Instead, much attention is devoted to highlighting the impact of the Government’s economic plan and SOEs restructuring aimed at economic and employment growth. There are some few small-scale interventions that will help working people, but nothing revolutionary from a real economic growth perspective.

Symptomatic of the political nature of the budget is the major announcement regarding the National Health Insurance (NHI). Spending in the NHI programme is set to increase at an average annual rate of 36.6%, from R 1.2 billion in 2018/19 to R 3 billion in 2021/22. It is a clear attempt to hoover up votes, whilst appearing to be broadening access to a good health care system without a comprehensive plan. On the surface it sounds great, to give the 86% of South Africans who does not have access to the world-class private health care system a functional and affordable health ecosystem.

Fundamentally the biggest flaw with the NHI is that it will drive up demand in a market that is suffering from a chronic lack of supply. Unless there is a significant drive to add to the hospitals infrastructure and health workers including doctors, particularly with market-driven innovative health solutions most suited to the under-serviced areas, then the NHI is nothing more than a token gesture that will end up adding to the cost of heath-care for the vast majority.

Despite five years of cost containments and budget cuts in government expenditure, the scale of the deficit remains a significant issue. It was initially planned that by the end of this parliament’s 5 year term the deficit would be reduced significantly. This was quickly swept under the carpet as due to the lack of economic growth and problems at the South African Revenue Services (SARS) resulting in lower than expected tax revenues of R 210.2 billion, which is 4.2% of Gross Domestic Product.

Even now, despite signs of marginal growth, the debt-to-GDP ratio is set to grow to 60% by 2023/204, and recede slightly to 60.1% the following year. This is not ideal but the fact that it is expected to grow only 4 percent over the next four years, and then remain there, shows that National Treasury aims to stabilise SA’s debt. We will have to wait and see if that will make the rating agencies happy.

My thoughts

Prior to the 2019 budget I felt that government was not serious about economic and business development. The conditional funding of Eskom and the Finance Minister’s demand for the appointment of a Chief Reorganization Officer is a conversation that is welcomed, but it still fails to be accompanied by a clear future role of the private sector in the electricity sector in South Africa and clear timelines.

However, it must be mentioned that Minister Mboweni is the first Finance Minister to openly questioned South Africa’s need for SOEs, implying that Government is ready to start looking at alternative solutions. It may be pure optimism at this stage, but this seems like a step to the right direction for businesses and investors.

I feel that a number of steps must be taken to ensure economic growth focuses on the creation of cities and towns, which show resilient economic performance, are job and skills rich, supporting good service delivery, have a key role for locally delivered public services, enable economic and social inclusion and promote equality of opportunity.

A strong partnership must be created between the commercial, public and social economies, to ensure that effective collaboration can take place. The last past 5 years has been characterized by a wide government-business trust deficit.

Most importantly, the government – business relationship must alter post the 2019 general election, to foster more collaborative working on national priorities such as job creation, skills, health and attraction of the 100$ billion foreign direct investment (FDI) target of President Cyril Ramaphosa over the next five years announced in 2018.

Is the 2019 Budget good enough to keep rating agencies from downgrading South Africa, getting voters to elect the party that the Finance Minister represent and improving business/investor confidence in the economy?

At this point one cannot say for certain, but I believe that there is a fair chance that the rating agencies are happy, an ordinary South African like myself feel that there is hope (although hope is not a strategy and will not grow the economy) and that businesses/investors are more optimistic after this Budget speech of Minister Mboweni.

Finally, the 2019 Budget speech also clearly demonstrates again to us that considerable financial resources go into Government spending at the national, provincial and local level. Therefore, we must ensure we get maximum “bang for the buck” out of the R 1.83 trillion budget.

Frankly, if we can’t use the rands and cents wisely and make a true transformational difference in the economy and in people’s lives, we would be better off giving the money back to the businesses and families that earned it in the first place.

Thokozani Thwala is the founder and CEO of GROWTHMAP INFONOMICS. He helps his clients with economic and business growth strategies, tools, speaks at seminars and writes on macroeconomics, business internationalization, and public policy.