Alec Hogg’s definitive Budget Speech breakdown webinar

Here is Alec Hogg’s definitive Budget Speech Webinar detailing the highlights from the Budget Speech and their respective consequences. Alec unpacks the crux of the issues in the 2015 Budget Speech, making it easy for everyone to understand the factors that affect the man on the street, as well as big business and everything in between. 

Well, there we go.  It’s Alec Hogg here in the studio at Biznews with…

Lucy Ferreira.

It’s nice to have you here, Lucy.  We’re going to be doing our Budget Speech breakdown.  You guys were just about as busy as I was yesterday.

Just about, but not quite. I think you were the busiest of the bees in lockup, bringing us all the latest breaking news.

I had seven hours to play around with all those documents that come from the Treasury, but it was a fascinating Budget.  There’s so much interesting stuff that we can go through and indeed, we’re going to be doing that today.  Lucy’s here to help, to prompt, and to pick up your questions as well, so go ahead. 

Do some questions for us.  Here’s the very first one for Lucy.  The next you put together, right?

It’s quite a scary graph, Alec.

Slide02

I think so and this really shapes the whole way that Nhlanhla Nene had to look at his Budget this year – the Government debt rate.  What I want you to do is look at where we are the moment.  We’ve just finished 2014/2015, so there we are.  The projection are that this is going to flatten out into the future.  Firstly, let’s just understand what this is about.  All around the world, rating agencies look at this thing: the debt-to-GDP ratio.  The higher you are, the more trouble you’re in.  Japan is at 200 percent.  Italy is at 100 percent.  Italy’s an interesting story because they’ve just changed their entire approach towards the labour legislation.  Their tight labour legislation has meant that in 20 years, they’ve gone from where they were as an economy 20 years ago, to exactly the same today.  They haven’t grown but their Government debt has trebled in that period.  If you look back here, ten years ago we were sitting at 31 percent.  Not great, but not too bad, certainly, but a global standard.  In the run-up to the Global Financial Crisis, it was a good time for our exports.  The debt-to-GDP ratio fell up until 2008.  What happened at that point was the entire world went into a ‘freeze mode’ and we in South Africa decided that this was the time to start spending more on the social net, spend on more trying to keep the economy rolling, and trying not to give it a hard landing.  Consequently, the debt has been risking.  The problem with debt and particularly with Government spending is that it’s not that easy to switch off the tap.  I’m going to take you here to 2012.  At this point in time, Pravin Gordhan said ‘we’re going to top out at 38’.  What has happened is that we are certainly, not topping out at 38.  We’re currently at 40.8, so we’re already ahead of where it was expected to top out.  Now, we’re hearing from our guys who are saying ‘well, we’re going to top out at 44’.  I guess you have to wonder.  Can you believe it?

No, absolutely not, especially when you look at global emerging markets.

Where things are not in our favour anymore.  That is how the whole Budget is shaped.  We have a country that’s been spending a whole lot more on social welfare.  It’s been pumping money into the economy to avoid the hard landing, but it hasn’t been grasping the structural issues.  Unfortunately, that is where we are now starting to get ourselves into an increasingly tight spot.  If Nhlanhla Nene is right in what he’s telling us now…  This is a fairly dramatic flattening off in the debt-to-GDP ratio.  Remember, you can do this in two ways.  On the one hand, you can increase taxes and on the other hand, reduce Government spending.  That’s really, the option.

Which hasn’t really happened.

Well, it’s very difficult to reduce Government spending, but they’re going to try to do it in this Budget (and we’ll talk about that in a moment).  That’s the one side of the equation.  The other side of the equation is GDP growth.  If your economy is growing fast, then your debt-to-GDP ratio is going to fall.  If you reduce your Budget deficit so you don’t have to borrow more money during the year, then it’s also going to fall.  To get it from where we are now here, back to there, is going to be quite an effort.  The Zuma administration came in with a completely different mandate and that’s where we currently are.  Interesting – the whole situation there but that’s the first of the drafts.  It makes a lot of sense, Lucy.

It does, indeed.

Slide03

Okay, onto our next one, which is really, to take us to the fuel tax.  That was the other issue.  The first issue was the fact that the entire Budget was shaped by debtors getting out of control – Government debts getting out of control.  The second point was ‘how do we get this money back’.  Well, there it is.  We went from a very low percentage of fuel in global terms in the twenties (27.6 percent on petrol and 28.1 percent on diesel).  If you look at this, it’s quite a detailed graph.  What we’re trying to say here is that up until last year, if you bought a litre of petrol, you would be paying R2.24 for a general fuel levy.  That goes into a slush fund for Treasury and another R1.04 for the Road Accident Fund.  Essentially, about a quarter of every Rand that you put into your tank, went in tax.  Now, it’s gone to 41 percent – a big jump.  That 41 percent for petrol and 43 percent for diesel is in line with the rest of the world.  It’s almost a sitter, if you think about it.  You’re sitting in Nene’s shoes.  He can’t keep spending.  He has to get taxes from somewhere.  Where does he look?  We’re below the rest of the world in two areas.  (1) is VAT, but that is politically unconscionable, isn’t it?

Yes, and it’s a very contentious issue, as we know so he couldn’t really go there without a massive outcry.

COSATU wouldn’t exactly have been excited about that one.  He had VAT, which was unlikely and the other option he had was ‘hey, fuel tax.  We’re in the twenties’.

Which has been helped by the oil price.

Well, it’s palatable because if you were at a R14.00 fuel price already, and then you added another 80 cents at that point – because we were at R14.00, just a few months ago.  If you went in this Budget and said ‘hey guys, you’re going to be paying R15.00 for your petrol in future’, there would have been an outcry of note.

Absolutely.

We’re now down to R10.00, so ‘hey guys, let’s pay R11.00’.

Exactly.

It’s room from an international perspective as well, so we can’t now start pointing fingers at the Government and say ‘you’re overtaxing us on fuel’ when the Brits, the Germans, and many other countries are doing the same thing.

Absolutely.

That is the big lot.  What many people haven’t caught yet is that the general fuel levy is what is in the Budget figures, and that’s R6.5bn, so we’ve gone from 30 cents up to R2.55 on the general fuel levy.  That doesn’t mean you aren’t also paying that R1.54 – from R10.4 on the Road Accident Fund to R1.54.  I can imagine a lot of lawyers rubbing their hands in glee.

We know how furiously they chase that Road Accident Fund and now there’s a windfall.

Entire businesses are built on it.  Nhlanhla Nene had bad news for them.  He said they’re going to change the laws.  They’re going to fix this up so that the lawyers don’t take the lion’s share, which seems to be the case now, rather than their clients getting it.

How long will that take?

Well, that’s the point, isn’t it?  Until they can get that in place, there’s R98bn underwater for the Road Accident Fund.  The whole thing is just, a disaster.  At this point, he said ‘let’s raise an extra R10bn in taxes’, which you and I are going to pay so they can put that into the fuel levy.  It’s quite extraordinary.

It is extraordinary.

Anyway, exactly R17.3bn is what we as citizens of South Africa are going to be paying extra through our petrol in this year.  You could think of this.  We have the problems in Gauteng with the e-tolls.  Why not maybe take that R10bn, which is going to the Road Accident Fund and put that into e-tolls?  We did discuss this in the press conference yesterday.  The way it works is you go there.  You have a lockup.  They give you all the documentation, including the speech.

Hundreds of pages, I’m sure.

They’re huge.  They’re like tons.  What I do is I work through the speech first to look at what the highlights are.  You’re in lockup from around 7:00 so you have three-and-a-half hours.  Then we had the video link through to Cape Town.  It was quite interesting.  On the stage, it was Nene, the Deputy Minister Jonas.  On the other hand was the Director-General and the fourth person on the stage was the former Director-General, whose now the Reserve Bank Governor, Lesetja Kganyago.  Three of them had quite a lot to say.  Lesetja didn’t have a single comment – the whole hour and a bit.  He just sat there as a Reserve Bank Governor.  Maybe he was expecting a question, but nothing was asked.  What was he doing there?  I had an interview like that once on television, where a guy brought his lawyer in and his lawyer just sat there in silence.

Adding no value.  I see we have a question and I think you’ve partly answered it.  I don’t think there’s any more that you want to expand on.  It’s from EJ and he says ‘will this fuel tax be used to pay for e-toll’s failure’.

The short answer is ‘no’.  The long answer is ‘partly’.  Remember, Road Accident Fund is a Government liability.  The guys in Government can kind of play with words a little bit.  An example of this was they said that they would convert the debt in Eskom into equity.  Well, hey guys.  You’re the only shareholders.  You’re responsible for all the debt and all the equities, and now you make some of your debt equity.  What’s the difference?

Absolutely.

In this case, with the money that’s going into the Road Accident Fund, he did say some money would go to support e-tolls, so there’s going to be some money coming in.  They haven’t decided how much yet, but it will reduce the liability on Gauteng motorists.  We’re here.  We’ll know how much when they’ve worked that one out, but it all comes from the same pot.  I guess you could say some of the money we’re paying extra for will be going into e-tolls, but they are not budging from the user-pay principle.  In a way, that’s quite sensible because if you’re going to be building more toll roads (or more good roads), Government can’t afford to pay for it, so we have to pay for it.  That’s kind of a different situation.  This is the big story.  The big story here is definitely on the fuel tax.  It was where he had scope and boy, did he use it.  He blew 80 cents/litre.  Just as well, the oil price has come down.

Slide04


Here’s another issue – property transfer duties.  I put this slide up here Lucy, because it gives you an understanding of the thrust of the Budget.  It’s all about redistribution, actually, which is aligned with when you saw that very first graph on the debt-to-GDP ratio.  It’s aligned with the Zuma administration ‘taking from the rich and giving to the poor’.  Call it Robin Hood.  Do you remember Robin Hood?

Of course.  We didn’t see it in dividends tax but we did see it in a huge way, with the property levy.

Well, they couldn’t do dividends tax.  These are interesting points.  They could not budget on dividend tax or corporate tax because they’re in line with the rest of the world. 

They’d need to be competitive or try, anyway.

When you start fiddling with that, then companies will go and relocate elsewhere or perhaps, relocate parts of their business elsewhere.  He could have moved on capital gains tax but those are very small amounts of money that come in.  This same with personal income tax – the two sides of the same coin – shows you exactly where the heads are in the Zuma administration.  Below R600k in the past, you didn’t pay transfer duty.  Now, it’s below R750k.  I’ve run a few numbers.  If you were buying a R2m house, you would have paid a transfer duty of R77k in the past.  Now, you pay R65k, so it’s a very small difference there.  Who buys a R2m house?  Certainly, not people listening to this broadcast.  Then we move onto a R3m house perhaps, and that’s where the crossover already becomes quite apparent.  R3m house: you would have paid transfer duties of R157k.  Remember, this is just a tax.  It’s a pure tax.  You’re getting no value whatsoever.

Nothing’s changed.

It takes months for the transfer to go through the Deeds Office.  They haven’t all of a sudden rapidly improved the situation.  This is just a straight, full-on tax because you happen to have worked hard enough to be able to afford it.  Now, you’d pay R167k, so you’d pay ten grand more.  It’s not too bad, at R3m.  R5m house: this starts getting interesting.  There, you will pay R70k more in property taxes and of course, thereafter, it goes up, and this is the reason why.  It used to be eight percent extra.  Now, it’s 11 percent extra.

I suppose the rationale is that if you’re buying R5m house, you can afford it.

Yes, but you can also afford to emigrate.

Exactly.

That’s the problem.

I have another question coming to you and I’m not sure if we’re going to be dealing with this later.  It’s from Themba and he’s asking ‘why are we paying for customs and excise levies’.

Customs and excise levies: it’s quite an interesting part of the whole picture here.  Governments around the world discover new ways of taxing us.  Many years ago, there was no such thing as income tax, for instance.  Then some bright spark decided ‘let’s tax the income of the people who work here’.  Here in our country, we had an awful thing called a ‘hut tax’.  It was introduced 100-odd years ago.  It was a tax where the colonialists wanted to tax the local people.  If they had a hut, they had to pay a hut tax, forcing them to go and work for big capital back in those days.  Taxes are an awful thing but customs and excise duties (they call it sin taxes) have been around ever since somebody thought ‘we can tax our population for smoking cigarettes and for drinking beer, wine, or whatever’.  Every year, they go up by at least the inflation rate and roughly half of what you are paying for a packet of cigarettes or for some alcoholic beverages, goes straight to Government.  We’re getting there with petrol.  It’s now 40 percent and we’re already there with cigarettes.  They’ll come up with another idea.  You can be sure of that.  They’re in line with the rest of the world on fuel, but that’s customs and excise and of course, when you bring goods into the country, you pay customs taxes there as well. 

Slide05


All right, let’s move on to the impact of these proposals because this puts it all into perspective, particularly how much we’re now paying extra on petrol.  Personal income tax: there’s a big number to look at.  Again, it’s a complicated table and you can work through this at your leisure.  That 8.275-million is actually, the key number.  Before this Budget, it was estimated and in fact, even in October last year, Nhlanhla Nene intimated that he would have to find R12.5bn.  That was the number.  He only found R8.3bn, excluding the R10bn for the Road Accident Fund.  Where’s the rest going to come from?  There’s another R4bn somewhere.  Well, that’s going to come from cutting Government spending and that’s also something, which has been very quiet in this Budget.  He mentioned (almost in passing) that Government departments are not going to be able to appoint new people.  They’re looking to have a salary increase of about five percent, but as Nene mentioned yesterday, they budgeted at seven-point-seven when they were negotiating with the public servants.  I don’t know where all of this comes from.

I was about to mention that because that was quite an interesting point if you just look at inflation numbers and curbing that spending.  Where’s the balance?

Talking about yesterday’s interviews, when I spoke with Sizwe Nxedlana from First National Bank, he said ‘yes, but with the property taxes, you’re going to save money up to R3m’.  He was absolutely right.  I misread that.  I’m sorry, Sizwe.  I apologise.

Public apology.

When you’re up at 4am, you’re allowed to make a couple of little mistakes.

We have to give you a break somewhere.

Look over here.  This is what it’s about.  You’re increasing income tax by one percentage point.  That means that in the past, if you were a top earner, you would pay 40 percent of what you earned over the top marginal figure, to Government.  Now, you pay 41 percent.  It’s not that bad.  Not too many people are unhappy about that.  However, in total, R9.5bn is going to be pulled in from this increase in income tax and we haven’t increased income tax in this country for ten years.  That’s another issue.

Wasn’t it 20 years?

It could be.  It’s at least a decade.

It seems almost unprecedented.

All right.  In the bad old days, they used to jack up income tax all the time.  Fiscal drag relief of R8.5bn: what does that mean?  It has nothing to do with crossdressers.  This has to do with the adjustment of the tax tables every year.  Generally, people will get an increase in line with inflation.  Since inflation goes up, they adjust the tax tables and what Treasury and Government has committed to doing, is adjusting those tax tables down.   If you get no salary increase, you’re going to pay less this year than you would have paid last year, provided you’re in the bottom end (below R37k/month).  That’s where it all kind of fits together.  Look at that.  This is really, the number.  In total, Government is getting R8.3bn for its pool inside, but there’s another R10bn outside of this, (which we as citizens are going to be paying) and doesn’t even appear on the numbers that goes into the Road Accident Fund.  They say ‘because it’s going into the Road Accident Fund, we don’t bring it into our revenue figures’, which of course, is bunk.   The Road Accident Fund, like Eskom, is 100 percent owned by Government.  It’s a little bit disingenuous but you can fool some of the people some of the time.

Slide06


Onto small business tax: there is some relief here.  It’s not small business.  It’s micro business.  They like to call it SME’s.  If you’re generating turnover of under R100k/month – I’m sure many people are listening to this podcast/webcast saying ‘hang on.  I earn more than 100k/month.  I generate pre-tax income of more than R100k/month.  Can I benefit from this?’  Sadly, you can’t.  You’re going to have to become a businessperson to do that.  The good thing here is that it’s for micro enterprises, really and as you can see, the tax rates have been dramatically reduced.  At R750k, you would have paid R15.5k in tax (or they would have).  Now, it’s R6.65k.  It’s almost tax-free, up to R1m turnover.  Very good but again, it’s for micro enterprises, not exactly small businesses.  Okay Lucy, are we winning?

We are winning.

Slide07

All right, onto the next one.  The impact of tax proposals: this table that tells the story of South Africa.  At the top end, we have two-point-seven percent.  Okay, let’s just tell you how this works.  This is taxable income down over here, so anybody who earns under R70k/year and is registered (roughly, eight-and-a-half million people registered as taxpayers and they generate R182m in taxable income for themselves) but because they earn less than R70k, they pay no tax.  There are eight-and-a-half million of them.  On the other end of the scale, take the people who earn more than R1m/year (the top end).  These are the job creators.  These people add value to the economy (one would presume).  There are 189,000 of them, two-point-seven percent of the total taxpayers.  They earn about 18/19 percent of the taxable income and they pay 33 percent.  They earn 19 percent of the taxable income, but they pay one-third of all the taxable income in South Africa.  That is called The Progressive Tax Rate.  These are the people, about whom politicians in other parts of Africa say ‘you should be protecting them, South Africa.  Don’t let these fellows go off to Perth, Australia, San Diego, or London.  Look after these guys because one-third of your income tax is being generated by these people.  You could call them ‘the golden goose’.  Is the golden goose being throttled to death?

Some would really agree with you.  Muneer Hassan from SAICO thinks so.

Quite a lot of questions are coming through, Lucy.

Yes, we’ve very much, addressed them.  One just wants to get hold of the slides.  We’ll send them off after.  The other was just whether that turnover figure was monthly on the small business table.

No.  Let’s just go back there.  That’s rather easy to do.   No, it’s annually.  You have to be below about R81k/R82k/month.  If you’re earning R1m turnover per month, your taxable income is substantially higher.  Sorry.  I wish I had better news there. 

Slide06

 

On this one, it’s quite clear.  Roughly, seven million taxpayers actually pay tax because they earn more than R70k p.a. or have taxable income of more than R70k p.a.  Of course, that is something very different, too because you have deductions in your taxable income.  That gives you an insight into South Africa and clearly, you must not anticipate that this little grouping here (the two-point-eight percent of the taxpayers who pay one-third of the income tax generally) are going to be cut any slack into the future.  If you are the ruling party in South Africa you look at 188,000 votes, you look at eight-and-a-half million votes, and clearly, it’s very obvious who wins.

Okay, let’s move on to these revenue breakdowns. 


This is quite an interesting table as well.  You can see the way that the various tax areas have gone up over the past few years and the percentage change.  Now remember, we are running a country with a four-point-four percent inflation rate and yet, personal income tax – in the most recent year – is budgeted to go up 13 percent (corporate income tax).  Well, you can understand corporates because they aren’t going to be making more profits.  The economy is tight and corporate profits are only going up by three percent.  The dividends tax: there’s a bit of a delay factor there, clearly – up 23 percent skills development.  I saw Andrew Golding from Pam Gold Properties.  He has rocks in his head.

What did he say?

He deals in the top end of the market.  On a press release he sent out yesterday, he said that the changes in the transfer duties are good.  Andrew, we’re only two percent more from transfer duties.  How can that be good?

What’s it going to do to the property market?

What’s it going to do to his clients?

Exactly.

If we’d said to the Biznews clients ‘we’re going to give you 22 percent less value for what you invest with us’, I don’ think we’d have too many clients left.

No.

Okay, not a good thing, Andrew Golding.  Reassess, please.  Value-added tax: that’s kind of in line with inflation – slightly higher than that.  There’s an electricity levy.  It’s interesting to see that they’re actually looking at that going down.  Of course, the fuel price going up by 10.3 is a little pessimistic.  It does exclude that extra 50 cents/litre, though.  Just think of that.  The general fuel levy – the slush fund for revenue – is more than double the inflation rate.   We have to hope and pray that the frackers in America keep fracking, that they keep the Saudi’s producing lots of crude oil so we keep the oil price down.

It sounds as though they’re going to do that.  We do have some more questions coming through.  I don’t know if you’re happy to take some.

Let’s go.

Dale says ‘was the tax for small businesses for any type of business, even if the business is purely a property company dealing with rental income’.  I don’t know if we have the detail on that.  We might have to get back to Dale there.

Dale, I don’t think you can differentiate between a small business and a small business.  If it’s a small business, you’re in business.

We have another one from Michael.  ‘Surely, the key to growth in SA is to increase income and therefore, tax of the R8m who are such poor earners’.

Of course it is.  You hit it on the head, Michael.  That is where the entire policy/plan falls down.  If you have a plan that isn’t growing the economy, if you have a plan that is not ensuring that economic growth hits the kind of target that you need to have as a developing country, then everything falls down eventually.  I’ll just go back to this very first graph. 

Slide08


This is what it’s all about – the Government debt-to-GDP ratio.  If this continues to rise…  This increase over here has been because of increases in Government spending, increases in social benefits, and not reinvesting into the economy.  According to the speech yesterday, apparently 60 percent of the money that the Government spends outside of its interests (that it has to pay off the debt) – 60 percent of that goes to Social Welfare.  We’re getting to a scary number.  We’re getting to a welfare state and at some point in time; those who produce the economic activity say ‘I’ll find a better place in the world to do it’.  Thankfully, we have something called home bias.  Thankfully, we love South Africa because we were born here, grew up here, this is where we want to live, and our friends are here, etcetera.  However, there comes a point where those who are creating wealth in an economy say they overcome that home bias and that’s the dangerous point, which you can reach if you continue to plug out the economy. 

Slide02


You’ve made an absolutely, vital story there – the registered taxpayers of eight-and-a-half million.  We need the economy to grow.  We need these people to earn a lot more.  We need income inequality to balance out, and that only comes from economic growth.  Consequently, the burden will be more fairly shared.  Are there more questions or shall we move on?

We have a couple and I’m just going through them from the time that we have to get through them.  What happens to the tax on a small business, once the turnover goes over R1m, and is this inclusive or exclusive of VAT?  It’s quite a technical one.

It is technical and it’s outside my sphere of confidence.  I’m sorry.  You’re going to have to ask Muneer Hassan or someone like that at SAICA.  This is a benefit for a micro enterprise.  Once a micro enterprise gets above a micro enterprise, then you fall into the rest of the tax category, but I haven’t done those numbers.

This is quite a nice one Alec, before we carry on.  Which sections of the JSE do we expect to be impacted by the new Budget?

That’s really, what we’re trying to get at.  In fact, we’re trying to get at the winners and losers.  Winners are the people who are going to be providing certain services to businesses.  Unfortunately, we don’t have any book producers but you if you were in that game, Government is now spending more and more money on textbooks because it realises that you need to give the young people textbooks, at least.  That was quite a big story in the Budget this year.  The losers are just about everywhere.  Big business is a big loser.  There’s no doubt that the electricity is going to hit big business.  There’s nothing at all that you can start getting excited about as far as the labour legislation is concerned.  The Government still hasn’t twigged onto the fact that inflexible labour legislation means you don’t hire people.  It means that you don’t get business growing.

It cripples the economy.

Exactly.  It means that your taxes eventually stop growing. 

Slide07


In fact, there’s a good tax for this GDP, which is something else they look at, as well.  Look at the gross domestic product.  There’s the total tax revenue following it there, and the gross domestic product, and that’s the rather optimistic graph that we got from Treasury.  By the way, this is not real GDP.  We always talk about real GDP, which is what you have to deal with.  You have to take inflation out of the picture.  This is nominal GDP – nominal growth in the economy.  Nominal growth is nine percent but last year, I think the inflation rate was six so you’re down below three.  In fact, it’s not even nine.  It’s round about eight percent.   What they’re saying to us here is that ‘we’re being really good as Government.  We’re not overtaxing you’.  Well, that was a period where there was excess in taxes.  That was a period where taxes were nowhere near what growth in the economy was like and we’ve gone back into that growing of the taxes. 

Slide09

 

Slide10



This is probably the best thing to talk to because we go through the Budget in a nutshell and from here, we can pull out the key issues.  I’m not going to do a ‘death by PowerPoint’.  Firstly, there’s no doubt that higher prices per litre will eventually have a knock-on effect.  Who would it affect?  It would affect Imperial, who was hammered – as you saw – in their results by ‘lowest car sales’.  We’re coming to realise as South Africans that we’re wasting too much on our vehicles.  I don’t think it will be an immediate impact, but in the longer term, our cars are too expensive.  People who are retailing cars: this is not a great Budget for you, when you get an 80 cents/litre increase.  That would be the negative.  The fact that income tax rates haven’t really risen that much would mean the bottom end of the market, for example retailers – so you’d be looking particularly Shoprite and to a lesser extent, Pick n Pay.  They will be happy with this because the redistribution of income to the bottom end is a good thing for them.

Whitey is quite happy with his recent and the results there so it’s probably just going to carry on, on that trajectory.

Yes.  Whitey Basson of Shoprite – nothing wrong with being in that.  They’re the people who really benefit a great deal.  If you own Shoprite shares, you’d be quite happy.  Woolworths is now largely, an offshore player with Australia, so you have to look at different issues there.  It’s like a clamp that is going on the richer sector of the population.  The way I described it after thinking about it a lot, was that there’s plenty in this budget for poor people or for the bottom end of the market, to get pretty happy about.  They’re going to pay less when they buy their houses.  They’re going to pay less in taxes because the rich are paying more.  You know the story: if you get a bonus of R1m, you’re delighted until you hear that your co-worker got a bonus of R1 000 001.00. 

Yes.

You think ‘dammit, they’re getting more than me’.  It’s a similar thing when it comes to taxpayers.  ‘Well, the rich are being hit so I’m quite happy’.  The poorer people will feel much more encouraged by this kind of move.  You’ll have more confidence there.  They’ll spend more.  That’s at their end, but the market will be happy.  There wasn’t enough of a contraction onto the top end of the market to get them unhappy.  It’s almost like ‘it’s a great country with great weather.  We have lovely people.  The home bias is not really, going to be affected by this Budget’, but next year and the year thereafter – watch out.  The lemon’s being squeezed.  How far can you squeeze it before you have a reaction?  I don’t think there’s a reaction in this Budget.  Even at Woolies, they’re going to keep on bending. 

Micro enterprises: well, that doesn’t help us in the stock market.  Certainly, smokers and drinkers…  We just don’t know when that tipping point is reached.  As far as electricity is concerned, a lot was said in the State of the Nation and again, here about the electricity levy.  I would be very concerned about ArcelorMittal and Sasol because the carbon tax is coming in.  That’s a guarantee.  They’ve put this extra two cents/kwh on electricity because until 2016, that’s when the carbon tax comes in.  Who’s going to pay the most carbon tax?  Eighty percent of carbon emissions in this country are generated by Eskom and Sasol, and I think ArcelorMittal are quite a big one, as well.  Sasol, in this country, is going to be the big loser.  Eskom: well, I guess we’re paying 2 cents/kwh now, so they’ll be able to pay the carbon tax when it comes in, in 2016.  They’ll pay it again, though. 

Sasol’s already struggling with the oil price.

Sasol is a big loser out the increase in the carbon tax.  We don’t have companies who are really, the property transfer duties.  We don’t have estate agents. 


Aida was listed some years ago.  They aren’t there anymore, so that’s no big deal.  The economic growth rate – that’s an issue. 


If you were going for big business, I’d be concerned because the GDP growth rate (as recently as October), was estimated at two-and-a-half percent.  Now, it’s two percent.  That’s a big adjustment in five months.  One the one hand, you’re going to be okay if you’re Whitey Basson because more is going to the bottom end of the market.  If you look at these GDP growth rate figures, you have to worry about South Africa Inc. and those companies that are heavily exposed towards it.

 

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Much of the JSE now is exposed offshore, so it isn’t really that much of a problem.  A budget deficit of three-point-nine percent: we can’t really believe these things anymore.  Every year, Treasury is overoptimistic and every year, they say ‘we’re not trying to mislead you’ but every year, they have excuses why things have changed.  I’m concerned as I’ve articulated, about this debt-to-GDP ratio.  It’s not expect to stabilise at 44 percent.  Will that actually, eventuate?  Every time that we’ve heard about the debt-to-GDP ratio coming under control, it hasn’t come through.  Social assistance: we now have an additional R7bn going there.  Sixteen-and-a-half million people in our country who were receiving that.

Gauteng e-tolls: we mentioned that a little bit earlier.  That’s not really going to make much of a difference.  Overall, I would be looking here for companies that are innovative, agile, and can move more rapidly to the opportunities.  I would be steering away from companies that have big labour forces.  There’s nothing in here, which makes me feel that our labour legislation is going to be correctly addressed so that it can stimulate economic growth.  It’s almost like the big (one benefit).  The little guys who are agile – the gazelles – is where I’d be focusing my attention.

Are we likely to see more listings on the back of that?  There was a bit of a listings run last year.  Could we expect something similar this year?

Listings are based on ratings and ratings are based on interest rates.  When you have a country where the debt is rising all the time; eventually, it catches up with you despite quantitative easing and everything else that’s happening around the world.  Then your interest rates start rising.  When interest rates rise, you then get the listings you don’t want.  You get the listings from people who can’t borrow from banks.  Inevitably, a company that takes its stock to the market does so because it can raise money more cheaply than elsewhere.  It’s possible that if the ratings hold in the market and the interest rates don’t rise too much, you could see more listings, but it’s a balance between the two.

Alec, an interesting question that many investors have been looking for, is ‘what happened to the tax incentives on savings’.

It’s coming in on the 1st of March.  He just referred to that in passing.  It’s happening on the 1st of March.  It’s a huge story.  In fact, it was interesting.  When Nhlanhla Nene was making his speech, he said that and there was a muted applause, and then he said ‘let me repeat this for you.  We are introducing the tax-free savings scheme on the 1st of March’ and then there was rapturous applause.  I guess the people who had been sleeping, woke up and those who hadn’t been paying as much attention, just followed those who had been paying attention.  It is a big thing.  It’s a good thing.  We have a country, which has a past.  Historically, it’s an enormous thing to overcome but we have to stop and say ‘no one really cares in the rest of the world’.  We can care and we can upset people in this country.  We can chase those 188,000 people away but we have to make a life for ourselves into the future.  The way we’re going to do that, is in what we do in future.  Things like the tax-free savings scheme, R30k benefit.  It’s not aimed at the super-rich, but it’s going to help to build middle society.

And a good culture for investing and saving.

The culture starts when people get the opportunity to work.  We’re not giving them the opportunity to work and that little penny hasn’t dropped yet.  That penny will drop one day.  Let’s hope that it isn’t when our debt-to-GDP ratio is at 70 percent.

Let’s hope.

Okay, let’s get into some of those questions because we’re running out of time.

We are and I have a couple here.  Some are longer than others are.  ‘Do the social grants keep the ANC in power as well as create a culture of wanting freebies?’  That’s another one from Michael.

If they keep the ANC in power – no doubt – but they don’t create a culture of freebies because they’re too low.  Remember that.  If you can get a job at R8k/R10k/R12k per month, why would you want to be on social grants at R1500.00/R1600.00?  They’re not high enough.  Many of us don’t get this.  A social grant in South Africa is really, just to stop you from starving.  It’s not something, which is preferable to getting a job.

I have another interesting one.  I suppose it’s less of a question and more of note, from Bosman.  ‘Shoprite fell two-point-eight percent today’.

I think that would some investors’ reactions to the results that came out.  It’s unlikely to be a reaction to this Budget.

Chris asks if there’s any news on the National Minimum Wage.

No, but there was news on the National Health Insurance Scheme and what’s happened there is it’s moving forward now.  We have National Health Insurance, which is something South Africa needs (again) to look after the people who don’t have access to proper healthcare.  That’s going to take a couple of percentage points extra, on VAT.  VAT is being held back.  It wasn’t moved this time around.  Fortunately, there was somewhere else to get the money from (the fuel tax), but VAT next year or the year thereafter – you can almost bank it.

I wonder if the oil price hadn’t dropped as dramatically, what would have happened to the Budget.  It might have been a different story.

It could have been.  Then there would have been a real dilemma.  Do you increase the petrol price at a time that it’s already high?  Do you risk the ire of the unions at a time when it’s already high?  You would have had to do one of the two.  You can’t just have big Budget deficits in this age because if your Budget deficit grows too much, the ratings agencies downgrade you and we’re already on the cusp of becoming junk bonds.  When they downgrade you, your interest rates on your debt (remember, we’re paying over R100bn/year in debt and it’s projected to be R150bn in three years’ time), that escalates.  It skyrockets when you need to borrow new money.  It won’t affect the money you’ve already borrowed, so Government has to somehow, keep its balancing act.

One last one coming through that I suppose, sums up the ideology of what the Budget means for South Africa.  ‘Is South Africa a good, long-term investment or should one lessen the exposure?’  That’s from Andrew.  It’s a tough one.

Not really.  The way the Government is currently going, the economic policies of the Government are in a direction, which does not make it business-friendly.  They have issues that are often driven by politics rather than economics, which is unfortunately, a trend that happens in a developing country.  I’ve said it before.  Since we’re moving in this direction, we’ve had pathetic economic growth in the last two years while the rest of the world has been recovering.  It’s purely and simply because we haven’t grasped the structural issues in this economy.  When we start grasping those structural issues – that’s the time to buy South Africa Incorporated.  We’re currently not grasping the structural issue.  You have to be looking for income streams from hard currencies – unfortunately.  As much as I love this country and I will do what I can to assist in growing it (as I think we all do), when you have a political dogma, which is going in a particular direction…  If you agree with it, then put your money into South Africa.  If you think that the NDP is the answer to all our problems, stick your money in here.  South African business has R670bn in cash on its balance sheets, waiting to be invested.  Is it being invested in South Africa?  No.

Are we making ourselves competitive enough to bring it here?

The rational decision on that is ‘I have all this cash sitting in the bank.  If this place is going to give me a good return on my cash, I’ll put it in.  If this place is not going to give me a good return, I’ll look elsewhere or just keep it in the bank’.

Absolutely.

Look at what corporate South Africa is doing, and follow.  I think that’s the end of our time.  Lucy, a couple more questions.  I see they’re coming through now. It’s a big late.

They are.  We can go through the last two here.  ‘Could an increase in Vat really have hurt the Government’s image with all the current negativity?’  That’s from Dale.

That’s a good point.  Some people did say they’re so far down.  They may as well have made us really take bitter medicine now and turned things around in the future.  I’m not so sure right now, that the trade unions, who still have significant power, wouldn’t have mobilised in a way that would have made it fairly embarrassing.  We might have to deal with that next year, but next year they’ll be able to sell the VAT increase on the fact that it’s improving National Health Insurance.  I think that’s what it was about.

What about curbing corruption as an outcry to what that’s doing to our deficit?

Curbing corruption is uppermost.  This is another urban myth.  It actually irritates the life out of me when I hear people saying that the ANC (as you can hear, I’m not a fan of a lot of the ANC) is a corrupt party and that the politicians simply want to increase corruptions so that they can put their snouts in the trough.  I hate that.  South Africa has the most transparent budget in the world.  Get that.  We have a better budget in transparency, than anywhere else on earth.  If you wanted to be corrupt, that’s the last thing you want to do.  This year, by the way, they’ve improved the transparency in two ways, by adding the state-owned enterprises, for instance.  That already big document: just go and read it and go and look at it.  You can see.   That’s the first thing.  The second thing was a critical thing in the State of the Nation address, which was completely missed.  President Zuma has signed into law, that Government/State employees may no longer do business with the State.  You might remember that during the Mbeki administration, that was resisted all the way through.  It’s in law now.  With the new procurement that has been installed, they are looking for State employees who are breaking that law – who are actually, doing business with the State through their wives or families, etcetera.  We are making progress on corruption.  It is moving in the right direction.  Don’t knock people on the head when they are trying to do the right thing.  I think we need to just step back and look at the facts.  This is not a Government that wants to be more corrupt.  This is a Government that wants to be cleaner.  It is really hurtful to people within Government who are seeing that. 

Lucy, that’s it for today.  Thank you for joining us on this webcast.  We will have it transcribed.  We will have everything on Biznews a little bit later, but I hope you feel a bit better informed now.

 

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