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The implications of Mboweni’s unashamedly pro-growth budget

Is there any hint that taxes may be raised? Saipa’s Ettiene Retief and Annabel Bishop from Investec discuss the facts and possibilities.

NOMPU SIZIBA: To take a look at what happened with the mid-term budget today, I’m joined in the studio by Ettiene Retief, the chairman of the national tax and Sars committee, from the South African Institute of Professional Accountants [Saipa], and Annabel Bishop, the chief economist at Investec. Thank you very much, both of you, for coming through.

Let me just start with this question. The National Treasury is talking about revenue shortfalls of R24.7 billion for 2019/20, and R33 billion for the year 2021/22. What’s the revenue shortfall estimated for 2018/19? I think we can direct that to Ettiene.

ETTIENE RETIEF: I think the predominant part of the shortfall is due to expected lower corporate tax and personal income tax. It was estimated at about R.7.4 billion. There are also the Vat refunds. A lot of that is catch-up from prior periods where the refunds haven’t been processed yet – where that still has to come out. So from that point it’s at least a positive that the true shortfall isn’t as significant; a lot of it is in fact historical items. But the largest portion is due to Vat refunds.

NOMPU SIZIBA: Annabel, obviously we are getting word from the finance minister just saying that the economy is not what we thought it would be. It’s not really much of a surprise, as the IMF [International Monetary Fund] and the like have already done, when they revised us. So the Treasury has downwardly revised our growth for this year to 0.7%. Originally in February they were hoping it would be 1.5%.

ANNABEL BISHOP: Yes. That’s actually our forecast as well. So we are also looking at 0.7% for this year. I think the consensus start was the right one, 0.5%. What do you do? We are in a very low economic growth economy. Since 2009/10 we’ve seen for the past decade just a deteriorated economic growth trend, right down, close to 0%. Of course, that comes on the back of the institutional weaknesses that occurred over that period, the deterioration in state-owned entities, of course the deterioration in government finances, and that negative business confidence.

Of course, real disposable incomes deteriorated this year, and real GDP per capita declined as well. So all of this makes a poor economic mix. And when you are at such a very low economic growth rate, we have a tiny sector like agriculture that is incredibly volatile. I can see a contraction of 30% quarter on quarter seasonally annualised. As in the second quarter you can so easily fall into a recession. Of course it was that recession at the start of this year, the first two quarters of this year, which caused this downward revision to GDP growth. If you exclude agriculture from the second quarter, you get a positive 0.1%, which means we didn’t actually have a recession. Of course, that agriculture print was due to the fact that the harvest was very late.

So, moving into the third quarter, the harvest will come in, we’ll go into positive territory and the recession will have ended. But such has been the impact on GDP growth and in turn the impact on the fiscal metrics, whether it is debt as a percentage of GDP – which has now ballooned up to a much higher projection – or fiscal deficit. All of these issues have really come to bear for us.

NOMPU SIZIBA: We’ll touch on agriculture in terms of the fiscal stimulus in a moment. But, Ettiene, if economic growth is slower and we still have the shortfalls in terms of revenue, then presumably that’s a hint that, come February, the fiscus or Treasury will be looking to try and raise taxes here and there. But the question is: where can they raise tax?

ETTIENE RETIEF: I think there are two points we need to take into account. The first is there is the principle called the Laffer Curve which indicates that, as we increase taxes, there is a pivotal point where the amount of revenue that’s been collected is less than the actual increase proportionately of the tax. There is already empirical evidence that we’ve probably exceeded that point. It probably isn’t an ideal situation to be increasing tax, and the minister did make reference afterwards that for at least a period of three years we shouldn’t be looking to increase taxes. We should rather be looking at reducing costs, which is obviously what we want to hear.

That doesn’t stop us, however, from expanding our tax base. One of those would have been carbon tax, but that has now been postponed further out until June 1, 2019. Some of the details relating to that still need to be clarified.

But there are further expansions in terms of taxes that we can get. I think that, other than cutting costs, will come more to the point of reprioritising of costs, [which] will come down to how we can expand that base rather than increase the current rates.

Government wage bill

NOMPU SIZIBA: Annabel, speaking to what Ettiene is saying about concentrating on the costs, or the expenditure side, the finance minister said the wage bill was the biggest cost pressure on the budget, noting that government has exceeded the budgeted estimate for the wage bill by R30.2 billion over the medium term, and that they have not allocated additional money for this. Just explain to us, as lay people, what this means exactly and what government will have to do to cover that shortfall.

ANNABEL BISHOP: That’s really the problem we’ve had – a significant over-expenditure in a low revenue-growth environment over the past decade. And the widening in this difference has seen the widening in the fiscal deficit. That means we’ve been spending more than we’ve been earning.

And the real issue we’ve got is in terms of government salaries and wages, when the increases are above what is budgeted for, is that that has to come out of someone else’s pocket, if you will – either taxes, or out of some other area of expenditure. Of course, the Davis Tax [Committee] itself has finished its work now, but it has indicated that the priority for South Africa in terms of fiscal consolidation is indeed, obviously, to cut expenditure.

This is where I think Tito Mboweni, our finance minister, could well come to bear with his very strong personality in terms of perhaps getting some work done on this, because we have such a significantly growing civil-service wage bill, as they say, due to the money spent on the civil service, not recently due to more civil servants but because salary and wage increases have been so very high.

Of course, working in this time is a priority for the financial minister because this is current expenditure. It’s not expenditure which is capital expenditure – in other words, on fixed investment which increases potential economic growth. It’s not going to be expenditure that’s going to give us fast economic growth down the line. Instead, if you were to expend on infrastructure, for example, that engenders fast economic growth.

This budget I think is very unashamedly a pro-growth budget. It’s not an austerity budget. And, as Ettiene was saying, not looking to see substantial tax increases, though we can talk about that just now. But it focuses very heavily on trying to bolster business confidence, to bolster infrastructure, and to try to turn this situation around in what has become a bit of a sentiment slump.

Wealth tax?

NOMPU SIZIBA: Ettiene, people tend to talk about a wealth tax. How practical is that in the South African context?

ETTIENE RETIEF: Taking that into account, The Davis Tax Committee has made certain recommendations on that as well. Part of it has been to say that we can just add a new tax to it, but we have tor revisit our position. We have estate duty already in place, so we have to either totally rewrite that piece of legislation in more modern terms, or we have to scrap it and replace it with a different tax. But we can’t simply leave what we have and just keep bolting on, because it’s not going to yield the result.

The other problem that we have is that, even if we talk about a wealth tax, we’ve got to be very careful what kind of tax we would implement for this, because there is work done by a number of different parties like [French economist Thomas] Piketty that goes, oh, you should look after the capital. Now, those would be fine in maybe the European context, but in a South African context it’s unlikely to work.

So a wealth tax is only going to deal with a very small portion of the population. It sounds very popular, but what’s more likely to happen is that you will find that people will try and evade that, just like they’ve done with others.

NOMPU SIZIBA: And they have the means to do it.

ETTIENE RETIEF: Exactly. They will look for ways, if nothing else, to remove their wealth from South Africa, because that’s the way of escaping from it [the tax].

NOMPU SIZIBA: Annabel, that R50 billion reprioritisation of spending – what did you get from the announcement? I see, as part of the investment in trying to kickstart the economy, a lot of talk about investment in the agricultural sector with some R16.2 billion being given to the Land Bank; investment in the township economies as well, not necessarily having to speak to just those. But how much of a multiplier effect do you think investment in those sectors will have?

ANNABEL BISHOP: Certainly I think a key focus, if you will, on this reprioritisation expenditure. Quite interestingly, the president indicated it’s going to be a mark of about R50 billion. But in the budget here it seems to be slightly above R30 billion, so not quite as big as expected. I note with interest that a lot of noise was made about some of it going to support jobs in the textile industry, an industry not very competitive globally, and one which is really a crutch to job support. So I think from that point of view perhaps not quite as fluid an economy as perhaps we were envisaging in terms of reprioritised expenditure towards competitiveness, to see faster economic growth. But nevertheless, it’s still key in an environment that needs strong job creation.

But turning, as you said, to the township areas, the key point in the economic stimulus recovery plan was fast economic growth. One of the reasons to do that is to look at industrial township parks, and this I imagine would include business hubs as well, the transfer of skills and really trying to upskill individuals into employment.

I think from that perspective this needs to be seen as positive. Government is looking, reallocating expenditure from areas that were either underspent or not spent, or perhaps underperforming. And then along those lines, perhaps it’s also quite key to note that running through this budget is the thread of public-private partnership, but also, more importantly, of private-sector delivery of infrastructure and expenditure. That was a key component of [the] Thabo Mbeki [regime] in the 2000s, when we saw economic growth lift up to 3%, and then to 5% and above – incredibly fast economic growth, with unemployment dropping down to 22%. Had we continued that for another 10 years you would have seen unemployment drop down probably towards the 15% mark. Such was the outperformance that we garnered.

I think the point is trying to return to that type of model. You see running through the document as well a strong focus on infrastructure, boosting business confidence, and in turn trying to awaken the appetite for business in South Africa.

Small business

NOMPU SIZIBA:  Ettiene, this is more a business type of question to you. Do you think it’s a good idea that government tries to penetrate injectors into the small business economy, rather than bigger corporations, because, at the end of the day, it’s the small companies that are going to be creating jobs, isn’t it?

ETTIENE RETIEF: I think we have seen, right around the world, that your small and microbusinesses are the ones that have the most potential to grow in the short term, and find jobs. But we have to be realistic in what those jobs would be. We can’t just say, well, that small business is going to be, let’s say, retail. It’s not going to really help. We are going to have to focus very specifically.

Unfortunately a lot of that is also going to come down to services. If you look at it, the dti [Department of Trade & Industry] and such are very dependent on things such as agriculture, and looking at things such as manufacturing and export. But one of the biggest exports around the world, and fastest-growing small-business sectors, has been the services. If you look at it, if we had to stimulate that, it also would be an opportunity for learnerships. So you start a business, you employ a person, they learn on the job, and you can in a very short amount of time create an increase in skills, real skills that make a person employable or create new entrepreneurs rather than unskilled types of labour.

And the risk in this kind of business tends to be a little less. They seem to last a bit better, they need less capital to get off the ground. And right around the world we’ve seen significant value come out of those. So I would say, from a South African point, yes, if it is correctly dealt with.

And I would say probably one of the biggest burdens that they have is not only government not paying on time and these types of thing, but a lot of other red-tape things, from labour to tax to a number of facets that make it a bit more difficult. I think a lot can be done there to create those stimuli.

NOMPU SIZIBA: Annabel, there is often an emphasis in the South African context on ensuring that the budget is pro-poor. Of course we did see that government has decided to put a Vat zero rate on products such as sanitary pads, as well as cake and bread flour. Perhaps that’s positive, but what do you think about that? Of course, it does have fiscal implications as well.

ANNABEL BISHOP: I think government is in a sticky position at the moment with that Vat increase at the start of the year creating a huge populist backlash. Not just populist, but a huge backlash for people who are really struggling in society to make ends meet.

Of course, this has been exacerbated now by these rather hectic petrol-price increases that we’ve been facing. And of course there is little in the kitty to roll back on that in terms of the equalisation fund. Government, the public finances, need to assist where they can. The items you mentioned are ones that clearly have come out of industrial debate and discourse, and will assist households. I think it’s quite key, really, for South Africa to balance the needs of the bulk of the population against the imperatives in the budget. But certainly looking forward, you can’t afford to extend the zero-rating to excessive numbers of products either; it’s a bit of a regressive tax there. Obviously the wealthy benefit from the zero-rating as well. So it makes it a bit difficult for government.

What you are really doing here is trying to address symptoms of the problem. Rather address the problem itself, and that is that people are unemployed or under-employed, earning very, very little, if anything at all, because the economy is just performing so incredibly poorly. I think that’s where perhaps this budget does shine – on the fact of really trying to think what we can do to promote economic growth. I’m not saying it has the answer, I’m not saying it’s done it right, but certainly it’s looking perhaps to hold back on excessive tax increases in view of trying to see what we can do to stimulate this economic growth.

I think perhaps we should see this budget as one of a number of factors that are going to come to bear in terms of government’s plans, along with the Investment Summit and a number of other factors. It’s a very difficult situation that we find ourselves in, and one where we could even see a credit rating downgrade just on the basis of this budget alone, given this quite substantial elevation in debt projection as well as the deficit.

NOMPU SIZIBA: We are going to have to start wrapping up soon, but I just want to ask a couple more questions. Ettiene, were you heartened to hear the finance minister talk about urgent steps being made to restore the leadership at Sars, given that you are a tax practitioner? Of course you would have been at the coalface of seeing the deterioration of the organisation. Were you heartened by that? And, given the fact that the Sars inquiry commission has made recommendations that the current Sars commissioner be fired, and immediately replaced with a new one, do you get the feeling that things may happen sooner than we expect?

ETTIENE RETIEF: I think there is a bit of a balance point, because on the one side I think the president wants to give proper and due cause for the currently suspended commissioner – for that process to take the proper legal course, and not to be called on that somewhere procedurally [that] it has been mishandled.

But on the other side we rely dramatically on the Sars insufficiency, and the trust we had in that institution. Mark Kingon, who is the acting commissioner, has done a fantastic job, and we can really see that our revenue collection up to September is comparatively greater than it was last year. So, ask anyone at the ground level and you’ll see how much more Sars has been doing in terms of revenue collections and dealing with it.

But yes, re-establishing the large business centre, trying to get the skills that have been lost back in, trying to deal with the infrastructural development and the modernisation of eFiling and the new systems that need to be done – I think the additional money being allocated to it will go a long way. But I think one of probably the most difficult situations is that the acting commissioner can do only so much until there is a permanent commissioner. So you still have a number of parties within Sars that may not be playing the game, and that needs to be rectified. But it’s going to take time. Any of these processes, even re-establishing the large business centre, doesn’t happen overnight. It’s only scheduled for April next year to be in full force. There are interim measures, but I think we are seeing very positive things coming out of it.

We’ll also see in December that administrative penalties start coming against companies for outstanding returns. So I think Mark and his team are determined to prove that Sars can do the job, and so far he has proved that he is up to the task.

NOMPU SIZIBA: Alright, guys, we are going to leave it there. Thank you both so much for your time.

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Funny how the elephant in the room is always avoided: the massive, wholesale, unabated, theft with impunity. And then the zeal and sincerity of great minds to devise ingenious plans and strategies to squeeze more money out of taxpayers to continue the funding of this looting is astounding.

End of comments.

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