Uncertainty is about the only stable principle in the upcoming budget
The Minister of Finance has to go before his peers to deliver a budget against a background of uncertainty as we have never had since Independence. This is not an easy task, and knowing the minister’s historical approach, the new budget will probably contain a number of safeguards despite a demand for higher spending in an election year.
Although the minister and his economic planners must have a fairly good idea what calendar year 2018 returned, he brings a budget to the table even before the final quarter figures are known. These are expected only in the first week of April. Much less does he have an inkling of what fourth quarter fiscal (first quarter calendar 2019) will produce, but with its small army of analysts and planners, I do not doubt that the ministry has a reasonable grip on what the broader economy is doing.
There are a small number of key values in the budget that will immediately lift the veil on the ministry’s expectations from 01 April 2019 to 31 March 2020. There will also be some further pointers in the Medium Term Expenditure Framework but these are too vague, at this point, to be meaningful over the next twelve months.
As always, calculating Gross Domestic Product, will be the biggest give-away. Except for nominal spending, all other derivatives depend on the assumptions that underlie the growth estimate for the economy as a whole. This, essentially, is the fundamental calculation that determines a whole host of ratios with an impact way beyond its mere academic value.
If the minister applies a 4.5% nominal growth rate as he did from 2016 to 2017, we know we are in for trouble. That figure does not even cover inflation. Consequently, I think the GDP escalation will be substantially above this very conservative limit.
If the assumed growth rate is pencilled in at 7.5%, the signal is one of stagnation. That is the rate used last year for the 2018/19 budget. With the jury still out on calendar 2018 growth, it will be a few more months before we actually get a preliminary indication of how true the 7.5% expectation was.
Another pointer will be the 2019 growth rate, as it was viewed twelve months ago when the current budget was tabled. At 8.7% growth, 2018 to 2019, it reflected the optimism that 2018 would have been a growth year, even if marginally so.
Perhaps the most revealling aspect, will be the actual GDP estimate itself. Again, going by last year’s expectations, 2019 were to be the year where GDP crossed the N$200 billion mark. For many people who do not have the inclination to go and work out percentages, or to split hairs over a percentage point up or down, the actual value itself is the easiest way to put the rest of the figures in perspective.
There were very few adjustments over the past year that can be used as tentative benchmarks. The 2018 mid-year review, which in the past served as a realignment of the main budget, was in that regard somewhat of a disappointment. It only served to shuffle funding around from the back pocket to the front, taking away from development, to paper over the government insatiable need to service its exorbitant wagebill.
One empirical piece of evidence, offered by the minister himself, was when he indicated that revenue collection was about 2% ahead of schedule. Of course, this does not automatically indicate that total revenue collection will exceed 2018 estimates by 2% but it does provide a sort-of indication that total revenue will be incrementally more than the budget estimates of last year.
It is important to remember that at this stage, there is a significant gap between 2018 estimates as put together by the Bank of Namibia, the Ministry of Finance and the International Monetary Fund. Current estimates range from anything between 1.2% GDP growth (BoN) to 1.8% (IMF).
This may look like small, insignificant deviations, but they are not. The differences between these estimates are expressed as percentage points to make the semantic distinction between faster and slower growth. As actual percentages of percentages, the real differences are much higher. Ask any statistics student.
From the Medium Term Expenditure Framework, we will get a glimpse of the ministry’s future thinking. Last year, the assumed growth from 2019 to 2010 was 9.2%, a level which is doubtful that it will be achieved.
All in all, as usual, dozens if not a hundred or more people will ask me what I think. Just going by the published figures (12 months old), the disappointing results of 2018, and the need to reactivate the economy, especially at consumer level, nominal growth of 6.5% is a safe estimate. This accommodates, more or less, the IMF forward view plus about 5% for inflation. If the GDP estimates reveal a 7.5% escalation, then the minister has some positive news which he has not shared yet with the rest of us. If, however, GDP growth, especially in the last two years of the Medium Term Expenditure Framework, rests on assumptions of around 8.5%, then the budget process will be in dangerous territory, resting on a very weak and unstable planning framework.
As a comparison, during the lofty 18% nominal growth days of 2013, 2014 and 2015, GDP was then projected to exceed N$254 billion in 2018. It never happened.
All the other values in the budget are to a certain extent academic. What the government Debt to GDP ratio is, is interesting but it does little for the economy other than providing the ratings agencies certain benchmarks to apply their own matrices. I am not saying that government debt is insignificant, but I am clearly stating that what we do with the money is ten times more important. As long as the overall expenditure remains within certain limits, and as long as the direct cost of debt servicing is still in view of the 10% benchmark, we are relatively safe, even more so in an African context. If the budget is applied in such a way that economic growth is tangible, the debt load can always be adjusted in future budgets.
But if the budget’s design leads to another stagnant year, then the debt load as a ratio, becomes bigger. Unfortunately, this is one of those existential paradoxes that is part and parcel of a national budget. To grow, investments must be made, but to invest, money must be borrowed. If the investments lead to growth faster than the rate of borrowing, the debt ratio comes down. No problemo.
If not? Well, I do not know. We will only see next week.
Oh, and by the way, the ITAS e-Service portal which was supposed to go live on 17 January, is still not active. Businesses still have to send a person to hand in the tax returns on the due dates. I wish I could relay some of the comments of the people in the queues here, but I can’t. None of them are very polite.