Hello and welcome to the So What podcast in which
political economic analyst JP Landman discusses
the issues uppermost in the minds of South Africans.
You can find a written version of this content
on JP's website JPLundman .co.za. I am Ruda
Landman and I am your host. Hello and a very
warm welcome to a newsletter dated the 12th of
May 2025 with the title Budget 3 .0, A Moment
of Decision. Two weeks ago on Freedom Day, the
Cape High Court prohibited the Minister of Finance
from proceeding with the VAT hike. Heavens, it
feels like ages and ages ago. But even before
that, the minister himself withdrew his proposal
for that vatike. Why did he do that? Because
he lost political support. If you go back to
our previous note on the budget, there are four
decisions to be taken in the budget. The first
decision is the approval of the fiscal framework.
That was approved on the 2nd of April, almost
six weeks ago. But there already one could see
it was, as we called it in that note, a very
close -run thing. The fiscal framework was approved
by a majority of 12 members of parliament, but
there were 24 members of parliament not present
in the assembly when the vote was taken. So it
was a marginal thing anyway. And we raised in
that note the prospect that the other three decisions
that awaits the budget may not be approved. And
what has happened is simply that some parties,
particularly actions of South Africa, action
essay, has walked back from their support for
the fiscal framework. And I think the minister
realized he didn't have the votes and he runs
a very real risk of losing the vote in the subsequent
three approvals that awaits the budget. And then
the court decision came on top of that, so it
was back to zero base. But all these complications
basically also arose because the legal situation
in South Africa has changed. Pretty much so,
in South Africa, before and after 1994, followed
the Westminster model of budget approval. And
the Westminster model was simply that Parliament
converted the budget up or they converted it
down, but they cannot change it. The detail is
frozen. You can say yes or you can say no, but
you can't change it. We've had that system in
our budget approval for many, many years. The
1996 constitution had a clause section 77 which
made it clear that legislation must be passed
by parliament to give that authority to parliament
not just to approve or reject but also to change.
For many many years before and after we became
a democracy our lower -round budget approvals
were fairly straightforward. Parliament could
approve a budget, they could vote it up, or they
could reject a budget voted down, but they could
not change the budget. The detail of the budget
was frozen. That was the arrangement before and
after 1994. Then the final constitution in 1996
contained a clause in section 77 that Parliament
must make legislation, must approve legislation
to give itself the power to change budgets, not
just to approve or reject them. That was done
in 2009, some 13 years after the final constitution
was approved. Now for the first couple of years
after that change or amendment it didn't really
matter because the ANC was still the majority
party and the Minister of Finance was always
ANC so if he proposes a budget then the party
votes it through and off it went. After last
year's election of course those numbers have
changed. The ANC is no longer in control on its
own, it needs to form coalitions with other people
and now you need the support of opposition parties
to get to get the budget through parliament.
So it's interesting to do that just to look back
a little bit at 1993, the year just before we
became a democracy, Derek Keyes was Minister
of Finance and he in one budget, in one move,
he took the VAT rate from 10%, which is what
it was, to 14%. It's an absolutely incredible
move. It was really a political achievement.
And so how did he do it? Well, he did it by consulting
with everybody inside and outside parliament.
Parliamentary parties, people outside like the
ANC at that stage, Kusato, Communist Party and
so on, about what the budget numbers are. He
shared it with them and he said, look, this is
the picture. What do you think we should do?
And in the end, nobody opposed. People may not
have supported But nobody opposed the movement,
the move of that from 10 % to 14%. At that point,
there also wasn't a majority party who could
just push it through. In a sense, yes. I mean,
you had a majority party in Parliament, but Parliament
was de facto already no longer the only people
governing the country. And Keyes had the insight
to see that and to bring the extra parliamentary
people along. Now, what happened now in 2025
is that the Minister of Finance, he missed this
very simple process trick. Just involve people,
give them all the facts, let them understand
what the situation is and then let them decide
what they want to do. He missed that simple process
trick and he paid a political price for it. Where
do we stand now? Well, where we stand now is
that The minister must table a new budget, which
he will do on 21 May, more or less 10 days from
now. And the numbers are quite frightening. First
of all, with NOVAD increasing the budget, the
deficit on the income side will be over a three
-year period, 75 billion round. It will be 13
.5 billion rand for this year. But remember next
year that was supposed to grow up another half
a percent. And then over the three year period,
which is the period of our budgets, that would
have gone up to 75 billion. So that's number
one. You're now 75 billion down on the income
side. Then secondly, when the budget was repaired
and submitted in February, it assumed a growth
rate for the economy of 1 .9%. Since then we've
had the Trump tariffs and all the shenanigans
around that. And global growth has been forecast
to be lower. Also South Africa's growth, more
or less by half a percent. The budget is made
at 1 .9. We can now work with a budget of say
1 .4, half a percent lower. If you have half
a percent less economic growth, obviously you
will have less tax income. And then the third
thing that has happened is that Trump has cut
all the direct transfers or grants that he has
given to South Africa for AIDS treatment, for
health research and so on. All that has been
cut and that amount adds up to just under 10
billion, about 9 .5 billion. So if you take those
three numbers you lose that, you lose economic
growth and you've lost the cash grant that came
into the country every year. You're looking at
billions and billions of a shortfall. It's really
a huge amount of money that has now been covered.
You say we are faced with a fundamental question.
What do you mean? The fundamental question is
now, given this huge shortfall in both income
and extra expenditure, what will our parliamentarians
who now have the ability to change the numbers
in the budget, what will they do? Will they be
willing to cut back expenditure or will they
simply ignore the fact that there's a huge deficit?
and simply borrow more money. That is really
the essence. We know there will be an income
shortfall. We know that expenditure is much more
than income. So where do you go now? Now the
important point here is in the last three years
under the under minister Gordon Gwana, there's
been a concerted effort to stabilize debt. How
do you stabilize debt? You run a primary surplus.
A primary surplus is simply your income is more
than your expenditure before you pay interest.
Once you've made interest, of course, you're
still down. There's a deficit. You must borrow
money. But at least it is the beginning of a
process of working down your debt. Now, for this
year, in the first budget, he had a number of
$71 billion round as a primary surplus. That's
a big number. That's a big number. If you can
run with $70 billion a year for a couple of years'
primary surplus, you will stabilize your debt
and you will start working that down. So the
critical issue now, the critical decision that
parliament must take, is will they stick with
a primary surplus of roughly $71 billion? It
can be a bit lower, it's not a strange motion.
Or will they simply ignore that run with the
expenditure which is there and run up more debt?
That is the question that's now facing parliament.
Why shouldn't we just borrow more? All those
expenditure items are incredibly important. No,
absolutely. Whether it's education or health
or AIDS or capital expenditure on infrastructure,
indeed. And that is the point about the budget.
There are a huge number of very important items
that nobody wants to cut. But you don't have
enough money. We don't have a money tree. We're
still looking to plant that. So you've got to
cut your cloak according to your cloth. And so
the cost of borrowing is what is important. Now,
let's just look at the numbers that the minister
had in his Swiss budget, which are the numbers
that we now have before his new budget. He was
penciling into borrow 394 .6 billion rand. It's
an enormous amount of money. That was after the
VAT increase. That was after the VAT increase.
Now he's lost the VAT increase, so that number
will obviously go up. The difference that it
makes Runa is for every 0 .01 % or as it is called
in the jargon one basis point. A percentage consists
of 100 basis points. Every one basis point increase
in the interest rate increases the actual interest
payment by an enormous amount. This 394 billion
that the minister wants to borrow it means he
will pay with 0 .01 % extra, you will pay an
extra 39 million rand a year in interest or to
put it more graphically, more than 100 ,000 rand
per day for every day of the week. So you're
talking big money here. You can employ a lot
of teachers and doctors for 100 ,000 rand a day.
Absolutely. So that's why it matters. You cannot
just borrow more because the more you borrow,
the more interest you have to pay and you lose
control of your situation. So what we've seen
when the budget was not approved and we had the
whole budget kerfuffle in February is that that
has already led to an increase in the interest
payable. And that increase will cost us more.
That is just the reality. Why is the bond market
part of what you're writing about? Where does
that fit in? The bond market is the place where
politics and economics meet. That's the place
where those two forces come together and they
result in a particular thing and that particular
thing is the interest rate. So the bond market
or the capital market is simply a market where
people with money come, pension fund, insurance
companies and so on, banks. They come there and
they offer money to the government which government
wants to borrow. Capital market is where governments
go worldwide to finance their deficits. It's
a standard institution worldwide. So you've got
people of money and you've got a government who
wants to borrow money. They come together. There's
an auction where people bid. This happens in
South Africa every Tuesday. And an interest rate
is set at which the government then can borrow
money from the investors. Now that rate is called
the long rate. Why the long rate? Because normally
the duration is for 10 years. It can also be
a little bit shorter, five years, seven years.
It can also be 20 years or 30 years. But the
average standard that we use worldwide is the
10 -year yield, which is the product of that
auction that takes place at the bond market.
So the bond market is really a very substantial
institution and an important institution. Without
that, the government will struggle to finance
itself and to finance particularly its deficit.
But it's also the place, as I say, where politics
and economics meet. political decisions impact
on a bond market. When, for example, we had the
Karfuful around the budget, the long raid went
up, because people were saying there's more risk
now. And because there's more risk and we don't
know whether we will be repaid, therefore we
have to charge more for our money. So politics
affect the bond market. There's no question about
that. And if you want to keep the long raid down,
you want to keep your long... interest rates
as low as possible. You need sensible politics,
but you also need sensible fiscal policies. We
actually saw this play out when the GNU was formed.
Absolutely. Since the formation of the GNU about
11 months ago, the long rate has dropped by as
much as 80 basis points. It reduces the amount
of interest that we have to pay substantially.
Since we've had the budget car full full, that
being reversed again and so on, Trump's tariffs
influenced that Many things play a role. The
big thing is to try and keep that number as low
as possible. And it's not just really because
it's about what the government pays in interest.
It also sets the cost of capital in the economy.
Everybody looks at the 10 -year yield. Companies
who want to expand, who want to invest, who want
to buy machinery. they look at the long yield
and they calculate the cost of capital from that.
So if that number goes up, your cost of capital
rises, investment becomes more difficult. That
number goes down, cost of capital goes down,
investment becomes easier. So it's a really important
number to manage in the national economy. In
fact, I want to go so far as to say that that
number, the long rate, is more important than
what the vet rate is. It's more important than
the vet rate. We saw the impact in America recently.
Even President Trump is not... What's the word?
Immune. Absolutely. We saw two big U -turns by
Trump. The first one was when he announced these
tariffs on Liberation Day, the 2nd of April.
There was a violent reaction from the financial
markets, including the bond market, three, four
days later he capitulated. And he said, OK, he's
suspending them for 90 days. Now we will have
to see whether those tariffs come back after
90 days. There's increasingly a view that they
won't. But that's not the point, the point is
he made a U -turn. His other U -turn was when
he after he threatened to fire Jerome Powell,
the chairman of the American Central Bank, Federal
Reserve. Once again, a huge reaction from the
bond market, Trump retreated. So much so that
the Financial Times talk about Tarco, Trump again
chickens out. Now he chickens out before the
power of the bond marker. We've also seen it
in the UK where less trust in 2022 became the
shortest -serving Prime Minister in British history,
50 days. Why? She submitted a budget to parliament
which was not funded at all, with no possibility
of funding it. And the bond marker just said
no, and she was out. We also saw it earlier here
in South Africa when Des van Ruin was our Minister
of Finance for four days. Why was he out after
four days? Because of a violent reaction from
the bond market. So the bond market is where
politics and economics meet. It determines the
long -rate and you cannot escape from that discipline.
In summary, so what? I think the so what is first
of all for the first time in our South Africa's
history, not just our democratic history, but
also before 1994, parliament now has the right
to change a budget, not just approve it or reject
it, not just vote it up or vote it down, but
actually change the numbers inside the budget.
They now have that ability. With that power of
course comes a huge responsibility. Parliament
now has the responsibility to exercise there
we can change at discretion or we can change
at power in a way which doesn't undermine the
broader economy in a way which is reconcilable
with what the constraints of the bond market.
Our biggest challenge at the moment is a challenge
that Gordon Gwana has been working on for three
years now and that is to stabilize our debt.
That you can only do if you run a primary surplus
and the decision now before Parliament is not
to take that surplus which is there and just
throw it to the wind and run a bigger deficit
because then we won't make it in the long run.
So politics and economics meet in the bond market.
Yes, the will of the people are important. We've
seen the will of the people expressed around
that debate. It's also now important to look
at long -term fiscal stability and we've got
to balance the will of the people with long -term
fiscal stability. That is the challenge which
is now before Parliament, before 21 May. Thank
you very much. We will be watching that with
great interest. Get the popcorn ready for 21
May. Thank you for listening to the SoWhat podcast.
If you enjoy this content, please don't forget
to leave a review and a rating, and please consider
subscribing so you don't miss any future episodes.
Also, tell your friends. Remember, you can find
a written version of all JP's content at jplandman
.co .za.