Budget 2021: Alec Hogg’s insights from inside parliament

BizNews founder Alec Hogg was in Cape Town for Tito Mboweni’s budget speech. After scouring thousands of pages of documents in parliament’s lock-up prior to the speech, he has valuable insights that he shared with his audience in a dynamic webinar session, post-budget. – Melani Nathan

On the ‘hidden’ Corporate Tax cut:

In all the documentation that I worked through, I could not see a cut in the corporate tax that would jump out at you being a company that, obviously our business is to see what’s happening in the corporate world… there was in the speech hidden away, the corporate tax rate has been cut from next year. To 27% from 28% in 2020, ‘big deal’, but at least it’s moving in the right direction.

On the government’s approach to  the Covid-19 pandemic:

They’re very proud of the discussions in the documents… South Africa, of emerging markets was one of the most aggressive to answer the covid-19 pandemic. As a consequence, I suppose they feel that it’s fairly justified that South Africa’s GDP has gone down as much as it has, although you would have thought that with a massive increase in government spending, which went up to nearly 42% of GDP in this past year, 2020… combined with this massive increase in government spending, a reduction of R230bn in revenues, and you’ve got a hole the size of, well, where they used to mine diamonds in Kimberley.

South Africa, despite that huge increase in government spending, was still one of the worst impacted in the world. Interesting to see that Nigeria is around about a 3% decline. South Africa, 7.2%. It was looking like it was going to be even worse at budget time. The decline was heading at 7.8%. It got a little bit better in the last few months. And the reason for that was better than expected improvement in the global economy. That brought up commodity prices and actually R100bn more in taxes coming particularly from the mining sector.

On South Africa’s current debt to GDP and how it got to these levels:

South Africa is really up a creek without a paddle. If I go all the way back to 1994, post-1994, there was an increase in debt to GDP and then very sensible management of the finances of this country and saw it get down to as low as 26% Then we had the Zuma factor and Zuma came in and he realised that he didn’t know anything about economics or numbers, but he knew he had to spend. The way he spent was by just expanding the public service. That extra money that was spent on public servants has been funded through debt. And the debt to GDP ratio in South Africa has gone from 26% to 54% by the time that Zuma resigned. It was almost like self-inflicted own goals. You can only imagine what Trevor Manuel is thinking after all the hard work that he and Thabo Mbeki, the president of the time, put in to get the debt down. Remember, you start servicing the debt first before you can spend any more money. After Zuma’s resignation [a] hospital pass came at Cyril Ramaphosa in the form of covid-19 and now there’s no shock absorber.

The debt to GDP has gone from 60% where it broke 60% only last year for the very first time to now, 80%. And it’s going to peak in 2026 if they are able to cut back on public sector salaries. These numbers are now starting to look really scary, particularly because the debt is being built up at a time when interest rates are very low. We aren’t seeing the real impact of this yet. Once interest rates start rising and you’ve got to roll over that debt, heaven help us.

On whether South Africans can trust that Treasury’s plans will come to pass:

Everything is premised on the basis of a R265bn cut in public sector salaries. Will that happen? Well, they’ve never cut before. They’ve made all kinds of threats and suggestions. But the unions, the public sector unions are very powerful, not least because they’re the ones who put the ANC government into office and they’re the ones who have actually been deployed there by the ANC government. Now the ANC government has to cut those wages. Remember, what this is not telling us that they’re going to hold the public sector wage bill static. This is talking about an actual cut in the next three years. And those are big numbers, R265bn. Are you sceptical? I am. I sat in that chamber, listening to Pravin Gordhan when he was the minister of finance, telling us he was going to be taking 5% of the procurement budget, R25bn a year by centralising everything and getting rid of all the wastage. And he had Kenneth Brown there as the head of procurement veteran from the Treasury. We were all terribly excited because this was one way of starting to get government spending under control. What happened? Pravin got fired. Kenneth Brown didn’t last very long. He went off and he now works for Standard Bank and, well, the procurement, we never hear a thing about it anymore. And then a couple of years ago, we had a similar story coming from Tito Mboweni, who said he was going to be implementing a highly innovative retirement package which allows public servants to retire early. He was anticipating that, again, they would be saving something like R25bn a year.

What would worry anybody with a rational mind is that those increases in interest payments are based on historically low global interest rates. When you start normalising the interest rates, these numbers become frightening.

On squeezing more tax out of a shrinking tax base:

You can only get so much out of a stone. There’s no way further to get tax from personal income tax payers. Mboweni knows this, that’s why he gave a little bit back this year by addressing fiscal drag. It’s really better than nothing. But to adjust the brackets and the tax rates or the tax tables by five per cent, all it does is offset inflation. The other thing that really must be concerning Treasury and anyone who looks at South Africa’s finance with a sensible eye, is that now only two million taxpayers, 35% of the population pay 80% of the personal income tax.

On ‘killing the golden goose’:

South Africa, it appears, just continues to attack its tax base. When you look at this reality, at this picture where 80% of the taxes for personal income tax, which, by the way, remember, is the biggest chunk, 38% of all the taxes that come in, 80% is paid by just two million people and gets even worse when you look down the bottom at the R135 thousand a month-plus club. These are highly skilled individuals who in fact, are globally mobile. They make up 0.2% of South Africa’s population and they pay 26% of income tax.

The growing burden of social grants on a shrinking tax base:

You’ve got, call it seven million people in total who do pay income tax. The vast majority of that, two million of them pay only 3% of the income tax. So that’s a  very small group of people who earn up to 150 thousand a year. Then on the other end, you get 18 million people or 30% of the population who receive social grants. The anticipation of the government, of Treasury, is that the 18.2 million people who are having social grants at the moment is going to go up by a million people in the next three years.

On the Fiscal drag and changes to Tax:

Every year because of inflation, people generally get inflationary increases in their incomes and that pushes them up into a higher tax bracket. And that really costs taxpayers the quantity that has been quantified by Treasury is R11.5bn. Treasury adjusted the tables to take care of the R11.5bn and then to add back another R2bn. So they put, call it R13.5bn that they adjusted the tables by this year, with the salary increases.

It doesn’t mean that people are going to pay more tax, but they haven’t been adjusting fiscal drag for a while. It’s a very easy way for the government to pocket another R10bn.

The second thing is that they’ve pushed up excise duties and tobacco taxes by 8%. Tax justice South Africa’s appalled by this because they said all they’re going to be doing is making the criminals richer because of the massive market now that there is in tobacco and alcohol products after the move towards prohibition during the Lockdown.

The third tax change is R400m that is being allocated for export on scrap metal, and that’s a long-overdue tax that’s been implemented and it relates to an attempt to stop things like cable theft and the scrap metal dealers who would buy copper cable from thieves to Telkom’s detriment.

The fuel tax goes up, the petrol price goes up and the diesel price by 26 cents a litre, of that, 15 cents is in the fuel levy and 11 cents goes to the road accident fund.

The public service sector:

If we were economically literate as a nation, we would be saying right now that we can’t afford public servants, much less the kind of low service delivery that we get from many public servants in South Africa. There are brilliant public servants. The state prosecutors are an excellent example, and of course, the doctors who work in hospitals, there are many people who serve this country magnificently, but unfortunately, they’re overrun or massively outnumbered by those who don’t.

On 12J investments:

Keep the money in the country… That’s the point. What they are complaining about in Treasury…they’re saying that so much of the money has gone into low-risk investments and it hasn’t created a lot of jobs. So just eliminate that. Stop people from using 12J for low-risk investments. But don’t throw the baby out with the bathwater on something that has raised billions of rands that stay in South Africa rather than going out… and doing it because you you’re not prepared to embrace the complexities of something.

On the Motor Industry Development Program:

We are subsidising to the tune of I don’t know how many hundreds of billions of rands, but it’s of that order. Have a look at what you pay for a car in this country and in our neighbouring states, it’s 30% cheaper. You may not bring a car into South Africa from Mozambique or Botswana or in fact, anywhere else in the world. Why? Because we subsidise the motor industry in this country by paying 30%more for our cars, then we should be. The reason for that is that you’ve got a few hundred thousand people who work for motor companies and they are being protected by the Motor Industry Development Program. When you have a look at Ford Motor Company investing a billion dollars into South Africa at a time that everybody else is running away with their capital, you’ve got to ask yourself, are they doing it because they love this country or are they doing it because they have a massive subsidy? And so when you look at that subsidy relative to something small like 12J, which really does help small and medium enterprises and can be refined, you’ve just got to shake your head and say these politicians are just playing politics.

What is the solution either economically or politically?

The solution is very clear. South Africa needs to become financially disciplined. It needs to attack the ‘white anting’ of its country, and if it doesn’t do that, it will go the way of Zimbabwe now. I mean, those are big words, it’s big statements, but you cannot continue to borrow indefinitely. That is what we are doing. That is what we’ve been doing. You have to at some point in time say our debt is too high, we now need to start not increasing it anymore and the way to not increase it anymore when you haven’t got additional revenue coming in is to cut your costs, not to continue to escalate them. That is exactly what Treasury has said.

On what South Africans can do to overcome the hypocrisy of politicians:

The hypocrisy of politicians is something that we should never underestimate. It is a reality. And our job as the court of public opinion, as the media who expose these things. is, I believe everybody’s job in South Africa, is to talk about these things, discuss them, think about them, and put the pressure on the politicians. Because the only thing politicians are really interested in is retaining power. If you expose the hypocrisy, the danger the risk to the retention of power is growing.

As a consequence the hypocrisy reduces, that’s the way a democracy works. But in our country, I guess we are a young democracy and we are still learning.

Breaking down the slippery slope of SA’s borrowing costs:

GDP in South Africa is near, R5tn? OK, so you take 3% of that and that will put you that’ll give you an understanding of how much you’re going backwards every year, that you’ve got to borrow. To just keep the place going.Those are the realities of where we are. Unless there is a reduction in the public sector wage bill, you’re going to have the 3% of GDP… three cents of every rand that is spent in South Africa in a year that you’re going to have to borrow to keep the government going. The only way out of that, because you can’t keep borrowing indefinitely.

You can’t squeeze more out of these taxpayers. The taxpayers are already, in this country, paying over the odds for the sunshine. The public servants are being paid way over the odds relative to others in the rest of the world. The answer, as Treasury tells us many times in this in this very lengthy document that it gives us every year…

The answer is clear, Treasury knows Cyril knows, Tito knows But does the caucus know? And if the caucus knows, is the caucus prepared to accept it? It’s interesting times coming.

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