The world is changing fast and to keep up you need local knowledge with global context.
This year’s Mini Budget, to be presented to Parliament tomorrow, is Maxi Important. We’re at such an important juncture in this country’s economic path that the tone, focus and overall direction is sure to be analysed in great detail. Is South Africa destined to repeat Leftist experiments created a lost decade of economic development in Eastern Europe and most of Africa? Or has the reality of the socialist ideal dawned on a SA Government that is rapidly running out of money? And on that score, with the SA economy in the doldrums, where will the tax rands coming from to pay for a bloated public service, ambitious social programmes and the long promised infrastructure investments? Rhodes University tax professor Matthew Lester will be among those in “lock-up” who get first sight of the documentation ahead of its public release tomorrow at 2pm. He’ll share the news and his interpretation as soon as the embargo ends – when the Finance Minister starts to speak. Here’s his preview – watch the video or read the transcript. – AH
I’m Matthew Lester from the Rhodes Business School. The mini budget for 2014/2015 will be presented to Parliament tomorrow. We have to identify the significance of this event. Some would say ‘well, for the last five years, we’ve had Pravin Gordhan as Minister of Finance’. In May, we had a change, we moved over to Nene, and now we have to say ‘what’s the significance in that’. No matter who the Minister of Finance may be, there are certain graphics that they have to observe.
Let’s go through them. There are your contributions to tax revenue since 1994. That might just look like a geological survey, but there’s a great significance in it. If one puts the growth rates together with the tax collections, we see a disturbing trend. In the glory days of Trevor Manuel, we had tax collections increasing by 12 percent per annum. Then we had the blip, but everybody expected that there would be a quick recovery. The recovery slowed and for five years, we collected taxes, increasing by eight percent per annum – just above the inflation rate. This went slightly up in the 2014 numbers but not enough to achieve the objectives of the National Development Plan.
Now, if we look at the growth rates and update them since February, we see that we’ve had one period of negative growth and we just avoided a recession in the second period so this does not look good for tax collections.
Now, if you go to the tax mix that we have around the world, we see that taxes are generally collected as follows: about 25 percent of the total tax collection comes from Personal Income tax but then, most companies have a significant Social Security tax. South Africa doesn’t have SST as we don’t have Social Security, but the total tax-taken directly from individuals, is generally around the 50 percent mark with a far lower emphasis on Corporate Tax collections, which were generally, only ten percent of the total tax-take. In South Africa, it’s much higher. Then, we have the Consumption Taxes.
The end result is that South Africa has a disturbingly big Corporate Tax-take compared to the rest of the world. This has a profound effect on National Debt levels because when companies are not performing, they are not paying enough tax and National Debt increases. South Africa’s National Debt has increased by over R1.2tr since 2008. Pravin Gordhan spent much time and effort in levelling off the National Debt trajectory. He did very well, but figure have not been playing in National Treasury’s favour since he left in May.
If we go back to February, we find that in 2014, South Africa’s tax collections were dead on target. The slight under collection of R5bn/R6bn on Dividend Tax was compensated for by an over collection of Corporate and Personal Tax. What we get is that we made it on a wing and a prayer. Now we set a new budget for the new year. This year, South Africa has to collect about R1tr and this comes primarily, as a major collection from Personal Tax (up R27bn this year). Of course, then comes value-added-tax (the second big tax), and then comes Corporate Tax. The big question in the national numbers is ‘can these three figures achieve their budget or balance each other out’. If they can’t, we’re not going to make target for this year. In the mini budget, we need to look for indications, for example, ‘are these tax collections on track’ because they will be very severe implications if they are not.
If we then take National Budgeted Expenditure – there’s the pie as to how it’s spent – and we haven’t changed the game plan massively over the last five years, we’ve been adding about eight percent across the board as we go along. Pravin Gordhan devoted his career to making sure that the various Government spends remain on budget and I’m sure that this trend will continue. However, we’re not going to be able to reduce the National Deficit very easily by reducing State Expenditure.
The National Debt may have been levelling off as at February. The big thing to look at is to say ‘well, where will we be when we get to October’. Obviously, this is critically important from the international sector where we have the Sovereign Debt rating agencies looking at us and saying ‘if that debt trajectory increases, well then South Africa is in line for another downgrade of its Sovereign Debt rating’ and of course, that can have a disastrous effect on the Rand.
Things are bad enough when we look at the Rand anyway. The balance of payment’s current account has been declining since 2011. There’s not much sign of any positive news there. The direct result of that – as we see in the last few months – is that interest rates have started to increase slightly again. We have to say ‘well, if tax collections are not enough and State Expenditure stays where it is, that will increase the deficit and we might have to compensate with an increase in interest rates to get more money coming into South Africa’.
The Rand is already under substantial pressure against the Dollar, the Euro, and the Pound and we see that this has a disturbing effect when one looks at various aspects of life in South Africa. If we just take the issue of oil prices: there, you see the magnificent drop of the oil price from around $115.00 back in June to the low 80’s today. Unfortunately, we haven’t gotten the full effect of that in South Africa yet, because with the decline in the Rand, the oil price has not fallen as much as it could have. What one sees is we might not have gotten much of a price reduction in September but certainly; we are due something in the beginning of November.
It’s all about what’s happening with the National Debt. Let’s see what happens on Wednesday afternoon. We have to say ‘there are the crucial numbers. Are we going to be able to maintain those targets? Will we get R1tr this year and ‘what if we don’t’? Which of those taxes, for example, could increase next year if the current taxpayers of South Africa is not going to see us through or assist us in achieving the objectives of the National Development Plan.
It’s ‘all best wishes’ to the Minister of Finance. We hope that he has the Wisdom of Solomon and can lead us through these difficult times. I’m Matthew Lester at the Rhodes Business School. Thank you for your attention.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.