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Unpacking the 2018 budget proposals

How will they affect the poor, middle class, the wealthy and South African businesses?

NASTASSIA ARENDSE:  Time to look at the tax amendments, including VAT, which Professor André Roux spoke of when he touched on the previous interview.

To do so I have Marcus Botha, who is the head of corporate tax from BDO. Marcus, thank you so much for your time.

MARCUS BOTHA:  You are welcome. As always, we had some excitement in parliament – this time by the DA.

NASTASSIA ARENDSE:  It was very interesting, because there was a point where last week or even towards early this week we were all speculating as to whether finance minister Malusi Gigaba would be the one delivering the budget. He delivered it. The EFF wasn’t there, but the DA had some stuff to say.

MARCUS BOTHA:  The delivery was accompanied by his very snappy dressing, as always.

NASTASSIA ARENDSE:  [Chuckling] So what did you think of the overall budget, before we get into the tax side?

MARCUS BOTHA:  The overall budget was very uneventful, VAT excluded. There is a handful of issues that we can discuss. And everything that isn’t a proposal affecting corporates is being left open-ended. So we are going to have to wait for the Tax Laws Amendment Bill later in the year to have some clarity on what exactly they proposing. We just have a hint that they want to resolve some issues or unintended tax consequences that have been the result of previous legislation passed. But we don’t know.

If we start unpacking the budget and just looking what’s actually happening here, they are increasing revenue by about 10% from the last budget. Where is that coming form? It’s R36 million that they are adding to the revenue from last year, and R22.9 million of that is going to be VAT.

Now if we jump quickly to personal income tax, and look at what’s happened on the marginal scale, they adjusted the scales with less inflation drag. So we are not compensated for inflation there, plus VAT is coming into play. It’s just going to be more expensive. So if you take the combination of the two, we are paying a lot more taxes at the end of the day.

Something like the medical credit is being increased by R7 a month.

NASTASSIA ARENDSE:  Everyone was talking about the effect it will have on the poor, and then you see on the social grant side grants are going up. I don’t know if this has ever happened – that grants go up in two phases, one from April and then again in October. He split the increase. Would that be enough to offset what you’ve just described in terms of the tax side?

MARCUS BOTHA:  If you look at taxing your public or your residents, then there are two ways – a tax on income or a tax on wealth. Last year it was a huge tax on income, when they moved the marginal top rate to 45%. And if we look at what they are doing this year, it’s the VAT.

And by increasing the social grants with more than the inflationary adjustment, they are actually compensating the lower income groups for the VAT rate hike, which will kind of leave them in a neutral position.

So it brings you back to the higher income brackets that will bear the brunt of the VAT increase. So essentially we are kind of back into the same position where the higher income groups will pay more tax. It’s just the VAT rate hike in this year’s budget.

NASTASSIA ARENDSE:  I know your focus is tax overall, but I asked Professor André Roux whether the GDP estimation was ambitious or not. He said it’s good and bad, depending on from which side you are looking. What did you think of the estimation of our GDP target?

MARCUS BOTHA:  I think “ambitious” is probably too kind, especially if we look at the history and previous predictive growth rates, and then the adjustments that had to be made later in the year and what the real growth rate was. To go from I think a 0.4, 0.7% to a 1.5% might be a bit steep. So I don’t think we should build our bridges on a 1.5% growth rate foundation.

NASTASSIA ARENDSE:  I can’t seem to find it in the speech, but I think in the first part he was commenting with regard to the global picture and all the positives that we are seeing from that side. But one thing that Moody’s has always alluded to, especially when they do reviews of SA, is that South Africa has become somewhat decoupled from the growth that we are seeing globally, and is not able to take advantage. Based on what we are seeing with the dollar and China and various other things – perhaps, David, you want to come into this – is it too late for South Africa to participate or have we almost missed the boat?

DAVID SHAPIRO:  To a large extent. What we forget is this is a tech-driven recovery. I was listening to Bloomberg this morning, an interview with the Microsoft head of Asia, and he said that by 2021 60% of the Asian growth will be driven by digital products and digital services. We are not there. In other words, our economy is not focused that way.

The other thing is that the strong rand is not doing us any favours. If you take the iron-ore price, the gold price, the platinum price, or any of our commodity prices, and you look where they were a year ago in rands, and where they are now, we are a good 10, 15% down on those kind of levels because of the rand strength. So we have to factor that in as well, which I don’t think has been put in, as well as things like the drought in the Western Cape.

We seem to have just dismissed all of these things as a non-event. And I saw even Tiger Brands kind of said “no impact” today. I’m concerned about those elements of it. So, if you look at the results that we’ve seen, I don’t think we have fully discounted where we are in this global economy, and what we produce. We just assume everybody is going to come here now that Cyril’s in charge, that everyone is lining up and knocking on the door. To do what?

MARCUS BOTHA:  It seems like the theme is just to link up with what was said in Sona and to carry those themes through. But when we look at the budget, it’s not actually reflecting the strategy on how they are going to get there.

NASTASSIA ARENDSE:  I was going to ask you that. Are there pieces of information that you thought he could have expanded on, or perhaps even given a strategy, such as “this is how we are going to do this”? For instance, the 1.5% growth, I used the word “ambitious”, but I didn’t get a sense of confidence as a South African citizen as to [their saying], “Okay, what are we doing from the moment we leave parliament to go and get this 1.5%?”

MARCUS BOTHA:  I think they are setting a target in the hopes of achieving it. And then we’ll probably have to wait for the investment conference which was mentioned in Sona, and the job summit. And my sense is that they are trying to get the answers in those forums or platforms and then chase the target of 1.5%.

DAVID SHAPIRO:  I also can’t see that happening. I think one of the big drivers was going to be increasing consumption, mainly because inflation has come down. Now you are going to get a 1% increase in fuel levy, a 1% increase in VAT. I don’t know the numbers closely enough, and I’m sure that economists who sit there with numbers can give you some greater view on that, but I think that’s going to impact on spending as well. As inflation comes down it’s supposedly going to get people more money in the back pocket to go and spend, which will stimulate the economy. I don’t see it happening.

But I also don’t see a big initiative happening here on the mining side, particularly, because that’s a big driver, and manufacturing. I’m still trying to find out where we are going to go or what’s going to happen here that’s really going to change things – unless we look at the services side of the economy, where we provide accounting services or we provide mining services, or we provide those kind of services into the rest of Africa, or even here. But it’s very hard to find where this is all going to come from. I’m talking as an investment analyst or as someone who is looking for the facts, not the story. Not the emotion. Yes, the emotion is there, but where are the facts, what’s the real story?

MARCUS BOTHA:  It’s a silent budget, essentially. All we’ve done is plug the hole, largely by VAT.

NASTASSIA ARENDSE:  So is there a positive takeaway that you got out of this speech?

DAVID SHAPIRO:  Let me do the income tax.

MARCUS BOTHA:  Let me put it this way. Corruption – I’d like to know more about that. Actually my personal view is we need a corruption tax for illicit wealth creation. [All chuckle.] But corruption is high on the agenda – how are they going to do that – it still is to be desired. Mandatory audits firm rotation with reference to Steinhoff, I think. But that’s old news. That’s been in the market; it’s been thought about, it’s been absorbed. So just pull the straw out of the hat that was in circulation for the last few months.

And then there was the auditor-general – that was an interesting one for me. I think giving him or her slightly more teeth could have a very positive impact on the state expenditure side.

NASTASSIA ARENDSE:  Thanks to my guests tonight. They’ve both rated the budget out of 10. David has given it 6.5, and Marcus has given it a 6.

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