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I felt positive after reading National Treasury’s 2021 budget. As expected, the numbers are terrible. My optimism stems from Government’s intention to tackle our massive fiscal deficit by reducing expenses rather than increasing taxes. While this seems like a no-brainer for anyone not directly benefiting from Government’s inefficiencies and largesse, this seems to signal a harder line by Government.
So with that optimistic note out the way, I want to highlight three simple numbers that explain how we got in this mess.
1. Expenses have grown faster than revenues for too long
In the tax year to February 2020, expenses grew 12.2%, versus a mere 5% growth in revenue. The result is a 65% increase in our budget deficit from R198 billion in Feb 2019 to R327 billion.
Growing expenses 150% faster than revenues is unacceptable at the best of times, but inexcusable when you already have an enormous deficit. If a country runs a surplus, or a modest deficit, it can be excused if it occasionally grows expenses much faster than revenues. Doing so repeatedly is unacceptable.
2. The deficit exceeds 20% of revenue
The Government overspent by R327 billion in 2020, which equals almost 22% of tax revenues. Think about that. Assuming we grow revenues at 4.5% per year, it will take around 5 years for tax revenues to catch up to our current expenses.
I believe the deficit should be compared to revenues and not GDP, which is a far bigger number that misrepresents the true financial position. A 6.4% deficit (measured against GDP) sounds far better than a 21.5% deficit. Sadly, we fund expenses with tax revenues, not Gross Domestic Product, which measures the country’s total output.
3. Expenses will continue to grow faster than revenues
Unfortunately, the Government still projects expenses to grow faster than revenues next year, meaning that our deficit will increase, not decrease. Government forecasts revenues to grow faster than expenses in 2022 but given Government’s poor track in its projections and an already overburdened tax base, one can’t attach much credibility to that today.
The 2021 budget projects the deficit to increase by 13% while our economy is projected to grow below 1% in real terms. The 2021 deficit is a whopping 23.4% of revenues.
So, why the optimism?
You may wonder why I am more optimistic after this budget. The reason is that we (and all the world’s financial markets) already know how bad SA’s financial position is, so the numbers presented yesterday are not a surprise. This dismal picture is the reason for the negative sentiment towards SA’s financial prospects and why we should not be surprised by any ratings downgrades.
My relative optimism is that government seems to realise that SA’s tax base is reaching breaking point. Rising tax rates further has more potential to erode revenues than to grow them. The only credible hope to restore our fiscal position is to reduce expenses, and Government seems to be taking the first steps towards this. This is a departure from previous budgets and outcomes, as evidenced by the 2020 fiasco with costs growing 150% faster than revenues.
Curbing expenses is consistent with Government allowing SAA to go into business rescue that will result in SAA being less of a cost drag to our country.
Government must still deliver on “lowering” expenses but at least its intention is now officially documented in the 2020 budget. And for that, I am grateful and more optimistic.
Steven Nathan is the Founder and Chief Executive Officer of 10X Investments.
