The Budget that got a B and failed! Budget 2016 Insights.

The Budget that got a B and failed! Budget 2016 Insights.

How can Minister Gordhan get a B and still fail? Because the pass rate this time for the Budget 2016 was an A. As a result of many years of failure, peaking on 9/12 with the sacking of Finance Minister Nene (our own 9/11 disaster), we stand at the brink of a ratings downgrade to junk status. We are not poised on a cliff’s edge, we are hanging on the edge by the tips of our fingers. It will hurt to pull us up now, but instead we are just hanging on a little longer until we fall (downgrade to junk).

What was needed for an A?

An A is a distinction, for that you need a near perfect presentation. In our current situation we are between the proverbial rock and a very hard place. The Ratings Agencies (let’s call them Rats for short) were mostly concerned with two things; our high and rising Government debt driven by the Budget deficit and lack of economic growth to supply an inflow of capital to fund our external deficit.

This makes life difficult because if you increase taxes to reduce the Budget deficit you automatically affect economic growth negatively and you end up with a no-win situation. Lower growth over time will also reduce the tax revenue, especially VAT. Ideally Gov would like to stimulate economic growth in a near recession environment by reducing taxes and spending more. But we have painted ourselves into a corner by not returning to a Budget surplus soon after the 2009 financial crisis. How wonderful was it to run Budget surpluses under Trevor Manual with growth rates close to 5%! Those were the days.

So, if increasing revenue by raising VAT is not a good option, how do you reduce the deficit? The only option is by cutting expenditure – drastically. The cabinet doubled under Zuma and the Gov wage bill ballooned. Drastic cuts could have been made.

What would also have appeased the Rats is a firm announcement of the dreaded P word. Yes, if Pravin announced firm Privatisation plans to reduce Government debt, the Rats could have taken a breather. The capital received from Privatisation would:

  1. Repay debt.
  2. Reduce the interest payable, which is already the biggest expenditure item in the Budget. Debt service costs is also the fastest growing spending category and will escalate in case of a downgrade by the Rats.
  3. Reduce the Budget deficit.
  4. Allow more effective and efficient running by the private sector.
  5. Save taxpayer billions in bailouts for SOEs like SAA, Prasa and Eskom to name a few.

To recap, what was needed was a drastic cut in Government expenditure and privatisation plans.

What did the Budget provide on these two scores?

The expenditure announced in the Budget was actually R12bn more than announced in last year’s MTBPS projection. Sorry, but the below inflation increases in cabinet salaries announced by President Zuma minutes before the Budget speech does not cut it. The Western Cape Government sets an example by flying economy class and taking cheaper cars than allowed. The Rats were looking for a substantial cut and were presented with an increase in expenditure. How can they change their negative outlook to neutral?

Pravin said emphatically that there are no Privatisation plans, only small minority shares will be sold. It is like expecting a car (even a second hand one) after promises have been made to you and getting a nice dinky toy car. Not enough by a mile or a marathon for that matter.

What getting less than a pass rate means

Bottom line – a soon to be announced ratings downgrade by the Rats. For more on the consequences of a ratings downgrade please read The Zuma Rubicon!

And what happened while he presented the Budget to Parliament? You don’t need to be an economist to interpret the reaction. For clarity on Bonds, an increase in Bond yields is equal to a decrease in price, obviously negative.

The Rand spiked as investors sold:

Budget Rand

Bond yields spiked because junk status will mean higher interest rates on Bonds:

Budget Bonds

Gerhard Lampen

Head Sanlam iTrade Online

 

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