Forward to a socialist Azania!
Someone once asked Mao Tse-tung, former revolutionary leader of China, for his views on the long-term effect of the French Revolution (1793-1795).
Apparently he thought for a while and then said: “It’s too soon to tell…”.
I feel the same way about this year’s budget presented last week by finance minister Pravin Gordhan. The full impact of this budget will be felt for many years to come, as it represents a fairly dramatic deviation from the path of recent years. It’s a brutal speeding up of the policy of gradual socialism, which the ANC has been following for some years.
But first some background to serve as a canvas to how the annual budget is presented and delivered by the media. The accredited media are locked up in some room close to parliament on the morning of the budget delivery and given the budget and all the supplementary documents. There is a very strict embargo on the release of this information as to ensure that no market sensitive information is leaked.
Various sectors of the business community are always on the lookout for various bits of information. Bond traders, for instance, watch the financing requirements of government carefully as it can influence bond yields (up or down) while the equity market looks for signs of increased company taxes for instance.
The media, who has this information at hand, cannot phone around and get second and third opinions for instance, so they tend to rely on their own interpretation of the budget as it is presented to them.
When the embargoes are lifted the stories are sent electronically to their respective media outlets and within seconds appear on radio, websites and on television. It’s a far cry from the days long ago when copy was delivered via phone (if it was urgent) or telefax machine and then printed some hours later. Telefax machine? Go and Google it.
It’s only in the days and nights that follow at various post-budget seminars that the real meat is fleshed out of the budget and digested.
I was astounded when numerous media outlets, even business-aligned ones, praised the budget as a “masterpiece”, a stroke of genius and so forth. Did they read the same budget as I did?
I admit that I approach the budget from a generally free-market, business/investor point of view. That is, after all, my function. Other people approach it from different angle and will look for other things in the budget. It’s the same as a group of people looking at a Salvador Dali painting. They will all see something different and no one will be right or wrong.
Dramatic shift to the left
I do feel, however, that this budget represents a dramatic mind shift by government. We are, I feel, headed towards a far more socialist and confiscatory regime. The sharp increase in the tax of the so-called super rich and increases in dividend and trust taxation, is just the start thereof.
It’s a case of “if we can’t make the poor rich, then let’s make the rich poor”.
I deducted a certain sense of glee when Gordhan deviated from his speech and hailed the progressive nature of our tax system. Read this budget in conjunction with the announcement by president Jacob Zuma on Friday when he said that land confiscation without compensation will become part of SA law. Ignore these threats at your own peril.
Or the announcement that South Africans earning tax-free income in other countries (Dubai, Abu Dabhi, Qatar) will also now be paying taxes in SA, despite the fact that they receive no services for their taxes.
As former US president Ronald Reagan once said: “If it moves tax it; if it moves too much regulate it; if it stops moving subsidise it.”
Here are a couple things in the budget that stood out for me:
- In his speech Gordhan had high praise for a certain Tony Atkinson. I was present with a group of financial types when the budget was read and not one knew who Atkinson was. Atkinson, I have subsequently learnt, is a British economist and author who had very strong views on income equality and a redistribution of income. He died earlier this year but was considered to be extreme left, even Marxist, in terms of his economic views and policies. For one, he was an advocate of a wealth tax of 65% for Britain. The fact that Gordhan, until very recently a member of the SA Communist Party, eulogised Atkinson says a lot. Expect more to come, especially if economic growth does not pick up.
- He admitted that the unemployment rate was 35%. This is much higher than the official rate of 27% as calculated by Statistics South Africa and closer to the real unemployment rate as calculated by the Free Market Foundation and the Institute for Race Relations.
- You are now considered to be super wealthy if you earn an income of R1.5 million or more. And there are only 103 000 in the whole country who qualify for this dubious distinction. This is not a great number (0.18% of the total population) and as I’ve said before, you could probably get them all into the Cape Town or FNB Stadiums on a Saturday afternoon to watch a game of soccer or rugby. Perhaps that’s what Gordhan (or any new finance minister) should do every year, to either thank them personally for their contributions which keep this country ticking over or to do a full medical to check on their health.
- This small group, in my opinion, is made up of chief executives, directors, senior executives, lawyers, engineers, senior bankers and entrepreneurs who create jobs and revenue for the state via their enterprises. How they will react to these sharply higher taxes is hard to judge, but some of them almost certainly, will up and leave to “islands close by” as Gordhan mentioned in his speech. It’s no secret that many hundreds if not thousands of SA entrepreneurs have decamped to Mauritius to set up businesses, paying a flat rate of tax of 15% with no capital gains taxes, no dividend withholding taxes and no estate duty. Expect this to increase, especially if wealth taxes are increased next year, which I expect they will.
- Government debt now stands at R2.2 trillion, above the level of 50% of GDP, which means that the cost of servicing this debt is now the largest item on the budget. This is up sharply from 25% in 2009, most of the increases while Gordhan was finance minister. And then there is still the national health insurance and nuclear plans bubbling in the background.
- A downgrade of our global credit rating later this year, which is not off the cards, will push this number sharply higher, leading to less being spent elsewhere and more on our debt.
- Tax morality is starting to deteriorate. Either that or the efficiency of Sars is dropping following on the departure of more than 50 top executives under the leadership Sars boss Tom Moyane. Revenue collections are falling way behind projections and could be as much as R40 billion (and not R30 billion) short by the time the SA Reserve Bank publishes the official numbers in April. Bingo! Another hole to fill as revenue collections come under pressure due to a weaker economy and more taxes being squirreled offshore.
- Treasury has not been very good at forecasting economic growth. All of the budget forecasts in the past six years have over-estimated expected growth in future years, sometimes by a dramatic margin. Subsequent growth has been much lower, leading to the undercollection of revenue and hence our current problem.
- The bulk of personal income tax is paid by a very small group of taxpayers. Less than 12% pay (based on 2016 numbers) about 62% of all personal income tax. More than half of those taxpayers find themselves in the financial services industry.
- Likewise company taxes. A small group of companies (about 325) pay the bulk of company taxes – 58%. Again, about 35% of those companies are to be found in the financial services sector.
No boost for growth
There was little in the budget to stimulate growth and boost confidence. In fact, the whole ideological premise of the budget was one built on transformation, a word used more than 50 times by the minister. By itself transformation will not lead to higher growth, as the minister and his party seems to think.
How does this all end? I don’t profess to have a crystal ball, but I think not well.
Many economic indicators (Johannesburg Stock Exchange, capital outflows , luxury car sales, business and consumer confidence, residential property prices, retail sales etc.) are all flashing bright red on the economic dashboard.
On the same day of SA’s budget Hong Kong announced several measures to boost economic growth and business confidence which included a lowering of taxes and tax holidays for small businesses. SA’s small business sector, in which I operate, is drowning in red tape and regulation. I checked with my compliance officer the other day and there are 14 current laws which we have to meticulously adhere to. Break even one of them inadvertently and one could go to jail or pay massive penalties.
Things are not bleak altogether, however. Perhaps what is needed is a “draining of the swamp” in terms of economic thinking, to be replaced with new ideas to rejuvenate the economy and confidence will come flooding back into the market. But on current thinking that won’t happen.
Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at firstname.lastname@example.org for ideas and suggestions.