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After the Bell: The essential (and existential) problem in the government’s Budget — and how to fix it

After the Bell: The essential (and existential) problem in the government’s Budget — and how to fix it
(Photo: Chris Ratcliffe / Bloomberg via Getty Images)

Getting the GDP estimate right is the first step in sensible budgeting. And how has the government done on this score? Would it surprise you to know that it has failed spectacularly?

It is Budget time again, and this one comes with a dark cloud hanging over it in the form of huge electricity cuts. The estimates of what rolling blackouts will cost the country are really gobsmacking.

SA Reserve Bank Governor Lesetja Kganyago estimated last month that rolling blackouts would reduce annual GDP growth by about 2%. This is in a country where, in good years, growth is usually not much more than that. Consequently, the bank now expects the economy will hardly budge this year.

Budgeting: what a wild conceptual game it is. There is a great cartoon that shows someone presenting, using a board on which there is a large circle with a pie-shaped segment highlighted. The presenter says, “This is the income that we wish we had.”

Because the government’s Budget constitutes about a quarter of GDP, it’s an important moment in the country’s life, but that doesn’t make it less of a wild conceptual game, because the whole damned ship is based on these projections and suppositions. And they say so much about the people who make them.

Real GDP growth

Key among these is real GDP growth. It’s the number at the core. Why? Well, because it changes everything. If the country is budgeted to grow by, say, 3%, but instead grows by 5%, then government income will explode, as it did in 2008. The effect is exponential, not linear, because corporate profitability tends to expand faster than the rate of general growth, and that boosts government coffers from corporate tax and personal tax because salaries increase as does VAT because people spend more.

This is very visible in the proportions of the main types of government income. At the moment, corporate tax constitutes about 15% of the total, personal tax is about 36% and VAT is about 24%. The remainder is made up of excise duties and import duties. But in the mid-2000s, corporate tax constituted about 25% of the total.

Very small changes in the numeric value of GDP growth result in very big differences in government income. That affects the government deficit (the amount by which expenditure exceeds income) and consequently, how much money the government needs to borrow to balance the books.

A single percentage point difference in GDP means the country grows or shrinks by about R700-billion. How that translates into government revenue gained or lost depends on the circumstances, but I would guesstimate it would add or subtract about R15-billion from the government’s piggy bank, roughly half the education budget.

Clueless budgeting

So getting the GDP estimate right is the first step in sensible budgeting. And how has the government done on this score? Would it surprise you to know that it has failed spectacularly? Drunken sailors budget better than our government has over the past decade; warbling parrots can explain this better than our national representatives.

Here are the ways budgeting has gone wrong in SA as a consequence of this one error. Nobody does this, but just as an exercise, I have laboriously gone through the Budget documents for the past 16 years looking for only one number: the anticipated real GDP growth rate for that fiscal year, as estimated by the National Treasury. And then I compared that to what actually happened.

So, take a rough guess: in how many of those 15 years did the actual growth rate exceed the estimated growth rate? The answer is three. In other words, the government has been consistently too optimistic in its growth expectations. The big exception was actually last year when the government wildly underestimated growth. But before that, for 10 unbroken years, the government was too optimistic.

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Not only that, but in the later years, the government was rather timid in its projections. From 2016 to 2020, not once did the government anticipate real GDP growth of more than 2%. And it still didn’t hit even these lower numbers.

The government forecasts three years ahead. Every single year from 2008 to 2020, the year subsequent to the Budget year, and the year after that, growth was estimated larger than the year before. So, the government was anticipating growth to accumulate. Instead, it stagnated.

Missed targets

So what happens when you budget too optimistically? Well, about halfway through the year, you realise that you are going to miss your targets, and not by a little bit. Then you panic and do something desperate. One year the government increased personal taxes on the rich. Another year it increased the duty on petrol. And then one year it hiked VAT by a percentage point.

And what is the story these numbers are telling us? First, the government’s view of the state of the economy is dangerously rose-tinted. And that is consistent with the extraordinary lack of any sense of regret about its actions. No one in government seems to be taking responsibility for this, which chimes with the blanket dismissiveness about the low rates of business confidence.

There is one silver lining to this dark cloud. Since the 2021 Budget, things have changed. For one, were it not for the Covid crisis, the government may have underestimated growth that year, but you can’t really pin that disaster on them. But then in 2022, the government did underestimate growth, suggesting a new caution is afoot. And the growth estimates trend downwards, not upward, in subsequent years. There is clearly a new sheriff in town.

What should we, or they, do about it? One of the government ministers I really admire, former Gencore chairman and briefly finance minister, Derek Keys, once said, if you have a huge problem, you need to lean on it with consistency and determination. Soon, it won’t be a huge problem, it will be a big problem, and then it will be a problem, and then it won’t be a problem.

I think what he was saying was don’t try to fix big problems in one grand swipe; let time do much of the heavy lifting, but be consistent. And I think the point is that if you don’t lean consistently on the problem, the problem will ultimately lean on you. And that is where we are as a country right now. DM/BM

  • Keys was the chairman of Gencore, not Glencore, as previously states. Apologies.
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  • Mac R says:

    “Nobody does this, but just as an exercise, I have laboriously gone through the Budget documents for the past 16 years”
    Thank you, Tim! 3/15 is a terrible track record and explains the ballooning public debt.

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