The National Budget is a big event for bond investors. This importance is evident in how we clear our schedules for that Wednesday every February, with many analysts then working through the night to get their detailed analysis into clients’ inboxes with urgency, and we keep both the Thursday and Friday calendars free for post budget meetings and calls. It was therefore with a sense of disbelief that we gathered around our Bloomberg terminals at 2pm on Wednesday the 19th February 2025, and no headlines hit the tape. This has never happened before in our post democratic era.
Stepping back, the cause of the delay was solely down to the incontrovertible truth that the rules of engagement have changed. Previously, National Treasury (NT) firmly held the reins – no other parties outside of the ANC were needed for Parliamentary endorsement, so they were able to construct the national budget on a figurative island of their own (there were indeed some unhappy Ministers over the years disgruntled with their allocations, but any political wrangling was deferred to attempting to cajole the following year’s provisions).
Although our very initial (bond investor) reaction was one of shock and dismay, after listening to the events of the afternoon unfold, we concluded that the delay was undeniably the lesser of two evils – yes, the rules of engagement have certainly changed and GNU parties are still learning how to act as a team instead of in opposition with each other. Forcing an unpopular budget through and taking it down to the wire of a Parliamentary vote would have been a significantly riskier strategy (and essentially could have been a nuclear option in these early days of GNU seasoning with parties setting red lines from which it would be impossible to step back from).
Zooming out, when we cut through the noise of the budget negotiations, there are two key requirements we have as investors in government bonds. Firstly, commitment to a near term peak in SA government debt levels, with the debt-to-GDP ratio declining over the forecast horizon. Second, the composition of expenditure needs to have a tilt towards economic growth, in these early days of a recovery in SA’s recovery from our woefully low economic growth era.
Categorically, there is no room left for our debt-to-GDP ratio to increase. At lower levels of debt, SA was seen to have fiscal flexibility – a term that describes the latitude a government has to withstand near term expenditure increases to absorb for example, unexpected shocks. At close to 76% debt-to-GDP (using NT’s pre-2025 Budget forecasts), this level is too high – much higher than our peers. National Treasury noted in the MTBPS (Medium Term Budget Policy Statement) document last October that SA’s public debt had reached a level 18.5% higher than the median for emerging market economies in 2023. A better way to assess the materiality of this ratio is to look at the debt servicing burden that this debt load carries. If you look at NT’s forecasts, the interest payments we are obliged to make on this debt load will soon absorb 21.6% of the revenues collected by government – crowding out other critical spending requirements. Higher borrowing is clearly not an option.
The only way to reduce debt-to-GDP levels over time is to run a primary surplus on the fiscal account – this is a fancy way of saying the goal must be for the government to earn more revenue from the economy (through sources such as taxation) than they spend (this measure excludes interest rate payments over which a country has limited flexibility). Not getting this budget balancing strategy the right way round has led to the alarming rise in our debt levels over the last seventeen years.
Tackling the first of these metrics – why not higher revenue through taxes? There are only three main tax revenue levers that can be pulled: of the R1740.9bn gross tax revenue raised in 2024, Personal income tax contributed 37%, Corporate income tax 18% and Value-added tax (VAT) 26%. Revenue from the fuel levy and customs duties are next in line at 5% and 4% of gross tax revenue respectively. Other taxation revenue streams are really minnows, in total raising 10% of the total across a number of different sources. SA individuals are already highly taxed, and represent a large concentration risk for the fiscus relying on a small percentage of the population for this contribution. Tax experts over the years have advised us that if you increase Personal income tax rates much further from these levels, you will drive individuals ‘either to the golf course’ (i.e. retirement) or ‘to the airport’ (i.e. emigration). What about Corporate income tax? It’s well known that corporate taxation rates globally are trending down – to stay competitive, SA would be foolish to run counter to this trend. The only meaningful revenue lever is therefore VAT – effective (as it’s relatively easy to collect) but regressive (it impacts all consumers (and therefore voters) in a country). Politically (as we have clearly seen in recent weeks), raising VAT rates should be used in emergency circumstances only.
What about performing triage on the spending side? This is at first glance a highly desirable goal – National Treasury has admitted for years that there are inefficiencies across many government-run programs than can benefit from rationalisation (and why the idea of zero-based budgeting was introduced into the discussion a few years ago but never actually got out of the starting blocks). This should indeed be focused on with urgency, but will take some time to analyse and process – and a material review before the 12th of March is not a viable strategy. Compromises will need to be reached on which of the new spending items under proposal will need to be curtailed to fit the revenue available.
Realistically, putting this near-term hand wrangling aside for a moment, a much better solution is within touching distance – intense focus on reducing economic growth bottlenecks and accelerating infrastructure to provide an enabling environment for stronger confidence and therefore higher economic growth rates is and should be the obvious focus. Higher economic growth would give us a larger economy from which to raise revenue – i.e. more taxation revenue without raising any of the actual tax rates themselves. It would also inspire confidence across investors, reduce the risk premium stubbornly embedded in our high government bond yields (and the Rand) and therefore lower government funding costs in the future. This sounds like pretty simple maths and doesn’t need to be overcomplicated. We are hopeful that the second iteration of the Budget on the 12th of March will show exactly this commitment and clear sense of urgency.
Article from Daily Maverick
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