The cold hard facts about Budget 2016
13 April 2016
You can also listen to these podcasts directly from the Old Mutual App, which is available here.
Hello and welcome to another edition of Old Mutual Live Business, my name is Chris Gibbons. We continue with our coverage of Budget 2016, especially post budget reaction. We spoke to one of South Africa’s best known economists, Mike Schussler, CEO of economists.co.za.
Who is also one of a very select group of people to have won South African Economist of the Year on two separate occasions. I asked Mike if he thought Finance Minister Pravin Gordhan had done enough in his budget speech. Especially with regard to keeping the overseas ratings agencies happy.
Mike Schussler: Well, you know, I don’t know if he did enough, I really don’t. But I can say this; I think our expectation of what this budget was meant to deliver has become too big. Because let’s take the context of the situation with the finance ministers that we had in December.
Yes, Mr Pravin Gordhan is a safe pair of hands, but given what happened and given that in previous budgets we have not quite implemented everything that we were supposed to do. We’ve come in and we said we’re going to implement even bigger and tighter, smaller budget deficits in future. But we didn’t deliver in the past. We’ve got this jump in finance ministers, people expected things like privatisation.
The markets reacted badly to the budget
The markets reacted badly to the budget. The rand reacted badly and so on, but let’s go back. Can one speech really change things when you’re in a tight spot economically? When you’ve done stupid political things? When the whole world is slowing down and people are starting to say: wait a minute, South Africa does not have the profit margin it had before. South African companies are all going overseas.
They’re presenting themselves as world leaders, but the government is not on the implementation side doing very well. Can one budget speech change everything? No. Did the speech do enough? I give it a 5/6 out of 10. But I don’t think that would have mattered, even if it was an 8. I think the people had just over-expected and also, you cannot expect one budget speech to change the world.
CG: Did we get some decent signals, I’m talking about the cuts in government spending. The freeze on hiring. The procurement efforts and of course, let’s not forget, SAA and SA Express.
The struggles with our budget
MS: Let’s just start with the budget, what we spend on, because then you’ll see how dire the situation is. 40% of our actual spending goes on civil servant salaries. That’s been linked to inflation. It’s going to be more than inflation. We all know that they also get notch increases and also government sits with promotions and stuff like that.
Where in the past you had say a 13% increase, 6.5 of that was the inflation agreement, the other 6.5 was other things. He’s going to cut that part, but we’re also in a place where inflation is probably going to be a lot higher than we had budgeted for.
So, the wage bill is going to grow unless we radically cut back and that’s not enough there. The state owned enterprises getting private partners is a good thing, but I just don’t know if anybody is going to pay for something that makes a loss.
CG: Would you buy a minority stake in SAA without some kind of control?
MS: No, I would want control. I certainly would want to, we’ve had a stake of, SAA sold before to the Swiss and to our airline captains. We need to get SAA out of our hair. SAA will cost us money and we need to get professional managers in to most state owned enterprises.
We need to do that, like we got Mark Barnes in, like we’ve got to get real professionals in. From our professions such as the auditing firms, such as the actual business runners of this country. We have got to make sure that we make business decisions first and also government policy must reflect that.
Will government implement Pravin Gordhan’s plan?
CG: Do you think there is the political will within government to allow Pravin Gordhan to execute this?
MS: I think even if people didn’t like Pravin Gordhan and wanted him out the way, they now know they need him. But the implementation part is really stopped by treasury. It always stopped by someone else. We can go to the debacle that we spoke about many times in our country. But we saw that implemented by Home Affairs.
Although the Tourism Department was against it, although the Cabinet Committee said: don’t implement this, it went ahead anyway. We have a bad track record with this and we need to see that these sort of things are implemented.
I think there’s a few departments I’ve always had respect for in South Africa. Be it treasury, be it the Reserve Bank, be it SARS and parts of the DTI. But it’s as if the other departments do not listen or want to listen and they want to do their own thing. They feel they have to be politically independent and their ministers tend to give them that. That is part of our problem.
CG: Final question Mike, downgrade, yes or no?
A Downgrade and the implications of it
MS: I think we are, unfortunately, going to get a downgrade. It doesn’t come overnight, but I think it looks like Moody’s is going to give us another downgrade this year. The other two, I would say, within 18 months to two years. Because remember, the other two are limited to June and December changes. I think by next year December we would have, at least one of them that have put us into non-investment status, which will become a problem.
CG: The implications of that, recession?
MS: Well, not straight recession, but we will have much less room to manoeuvre. It won’t be a dire straits immediately, but all new government debt will cost more. That will take away from the spending and that will concentrate government minds even more.
I also think you must remember, a crisis is never a once-off thing. This commodity price collapse over the last 4-5 years has brought on this crisis, it’s been added to by the drought. It’s been added to by stupid political decisions, by high strike rates, by whatever you want. But ultimately, and this is the point, is that we haven’t been facing the facts for a long time. This ongoing crisis will force us to look at these facts.
That is the good news because we will now, and we’ve seen this, have the changes where necessary. I think Pravin Gordhan is not going to get the power overnight, but as the crisis drags on, he is going to become a much more powerful figure. Or someone like him, is going to become a much more powerful figure.
CG: Mike Schussler of economists.co.za, thank you for being with me on Old Mutual Live Business.