WHY has the bond market not crashed? That's the question that's been puzzling me ever since the Sunday Times revealed the alarming fiscal profligacy the ANC is planning.
Bond yields on Monday and Tuesday were little changed from Friday, despite the front-page lead in the Sunday Times on the ANC's election promises. Clearly, the market simply doesn't believe that the ANC will make good on its promises.
It's all very well to believe that politicians lie, but even if the ANC only delivered on half of what the Sunday Times reported, SA's fiscal prudency will lie in tatters and all Finance Minister Trevor Manuel's good work will have been undone. It doesn't make sense for the market to disbelieve this massive shift to the left - effectively creating a welfare state - and to carry on as if nothing has happened.
The bond market's failure to react to the revelations in the Sunday Times is symptomatic of a syndrome prevalent in SA for some time now - economic policy schizophrenia. It is a situation in which ANC president Jacob Zuma and government spokespeople all make soothing noises to the markets, promising no change.
At the same time, policy documents such as the ANC/SACP/Cosatu alliance statement and the draft election manifesto tell a story which is the exact opposite. The markets are choosing to believe the politicians, who are telling them there will be no change, ignoring the promises to the electorate.
Radical changes
We have a classic case of having your cake and eating it. Trouble is, at some point either the election promises have to be broken, or the markets are going to come crashing down as they realise that the "no change" mantra was a lie.
Quite simply, if the ANC draft election promises make it into the final manifesto, Manuel's budget framework must be thrown into the bin and his mini-budget regarded as rubbish. The crucial question is whether Manuel himself will start implementing the radical changes envisaged in the draft manifesto in next year's budget.
In that case, the small deficit of -1,6% of gross domestic product, or about R42bn, will be thrown out and a much bigger one can be expected. The whole exercise would make a mockery of the mini-budget and the fiscal framework it spelt out for the next three fiscal years.
To get some idea of what the ANC is planning, it's worth going back to research done years ago on the implementation of a basic income grant (BIG), which is one of the election promises. Respected Stellenbosch University academic Servaas van der Berg found that the top marginal tax rate would have to be increased from 40% to 66% as part of BIG's funding, which he calculated would cost the fiscus R54bn (including administrative costs.)
New debt trap
Set that amount against the projected budget deficit of R42bn for the next fiscal year, and it's evident how massive the planned increase in spending is. And Van der Berg's calculations were done in 2002, based on a BIG of only R100 a month. This amount may have changed, given inflation.
Other promises reported in the Sunday Times include universal health insurance, extension of the child support grant, an additional grant to mothers, a wage subsidy, and a mandatory retirement savings scheme. It seems that the wage subsidy would no longer be used to make the mandatory retirement savings scheme workable for low income earners, but instead to help people between 18 and 25 to get into the labour market. This would leave a hole in the mandatory retirement savings scheme.
The ANC came out after the Sunday Times story to ensure people that the promises had been "costed" and that they won't "bankrupt the treasury". This is no comfort.
The party hasn't said how much the plans will cost, or how they will avoid bankrupting the treasury. Most importantly, they haven't said how they fit in with the three-year fiscal framework outlined by Manuel. It's that framework that the market still believes, refusing to acknowledge that the shift to the left is happening.
If government borrows massively more than at present, it will find itself once again in a position where its interest payments balloon to a point where it's borrowing just to service debt. This is the debt trap that Manuel saved us from.
It's now imperative for everyone with any common sense to speak up and make it clear that the election promises will lead to a new debt trap.
That means that we can no longer accept the "no change" mantra. It also means that - until we have learnt otherwise - bonds are not pricing in the risk of a massive shift to the left. The market should wake up and smell the rot.
- Fin24.com