BUSINESS NEWS - Enoch’s budget speech on Wednesday was just 25 words longer than his budget speech last year, coming in at just under 4,000 words. It was one of the shortest ever presented in parliament.
The most verbose Finance Minister of the past 15 years was Pravien Gordhan, whose budget speech came in at 10,000 words back in 2013. Maybe those were the days when government was still making big promises.
The budget has already been dissected in 500 different ways. Consensus is that it was good.
Personally, I liked it because it was short. A shorter budget means fewer promises. Less bull.
A budget is important, and we should all have one (or a rough idea) of what comes in and what goes out every month. But it can’t (shouldn’t) be taken in isolation.
We need to consider it in the bigger picture of the structural makeup of our economy, what drives our tax revenue, where we sit in terms of our total national debt, and what we expect from the future.
Like I said, there’s more to it.
The chart below shows our national debt as a % of GDP since 2000 split into three distinct periods –
1 – Decreasing national debt from 2000 to 2008
2 – Rising debt during the Zuma era between 2010 and 2020
3 – Flatlining debt under Ramaphosa
Chart: South African Government debt as a % of Gross Domestic Product (GDP)
Now I’m going to say something controversial – the prominent driver of the direction of this budget has very little to do with those in charge at the time.
Sorry, Mr. Manuel and Mr. Mbeki, you can’t take full credit for lowering the national debt between 2000 and 2008. And we can’t fully blame Zuma for increasing the national debt from 2010 to 2018.
The major determinant in our ability to control our national debt is the commodity cycle – the price of resources which in turn drive our resources sector, which in turn drive a very large component of our national tax revenue.
The chart below shows the performance of the resource sector during Mbeki’s time as President. The sector generated a 30% annualized return over the period, as a result of massive growth and resource demand from China. As a result, we saw massive tax revenue.
Chart: Performance of the South African resources sector when our national debt was falling
What happens to the budget between 2010 and 2018? (period 2 in the debt chart). It goes up.
Guess what happened to the price of resources during this time?
The chart below illustrates - the resource sector (as a proxy for commodity prices) did 2.8% per annum. That’s terrible. Think of the impact this had on tax revenue. No-wonder debt levels increased.
Chart: Performance of the South African resources sector when our national debt was rising
This is a terrible thing to say, but Zuma didn’t cause this. His administration took over at the worst possible time. He was a bit unlucky.
In fact, this period was terrible for the whole world. The global economy grew only marginally, and most countries' debt levels rose in line with South Africa’s.
The resource sector has always been the saving grace for our economy and our budget. To say nothing of the jobs created, the tax revenue sustains our mass welfare state.
When Tito Mboweni took the stand in parliament to deliver his budget speech in 2021, he estimated our budget deficit would be 87% by 2025 (see period 3 in the national debt chart). Well, it’s currently just over 70%. It’s nowhere near where he projected.
Why? It has nothing to do with economic growth or budget restraint. The resources sector ran on the back of Chinese growth.
The chart below illustrates – rising resources prices meant rising tax revenue which stabilized our national debt.
Chart: Performance of the South African resources sector 2018 until today
As a result, we had an incredible tax windfall. Tito actually lowered taxes in 2022 (!).
Obviously, 2023 was a bad year for resources and consequently our tax collections. So, we find ourselves in a tough spot. We are spending more than we are earning. But it’s understandable.
My point is that things aren’t as bad as many in the media or around the dinner table say they are.
Think of the resource sector as South Africa’s personal Family Trust. We inherited it. We don’t necessarily deserve it, but it’s there and we rely heavily on it. And it’s not going away. Without it, we would be lost.
In the down years, the Trust doesn’t help as much as it could. But the up years will come again. We just need to be responsible and patient.
Matthew Matthee has a wealth management business that specialises in retirement planning and investments. He writes about financial markets, investments, and investor psychology. He holds a Masters Degree in Economics from Stellenbosch University and a Post Graduate Diploma in Financial Planning from UFS. MatthewM@gravitonwm.com
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