Matthew Lester: Addressing known Budget 2017 concerns and raising new ones.

SA’s Finance Minister Pravin Gordhan believes the National Budget is a lot more than an accounting exercise. For the ANC veteran, it is first and foremost an instrument of political policy – a view he reiterated at various times during and before Wednesday’s Budget address in Parliament. And the policy promoting redistribution (the cornerstone of socialism) is uppermost in his objectives right now. Gordhan is very popular at National Treasury, perhaps overly so, as the 2017 edition of the Budget lacks the normal financial conservatism which South Africans have come to rely on. I quizzed Rhodes tax professor and regular Biznews contributor Matthew Lester on all this – and in his usual forthright style he addressed not only my concerns, but raised a number of new ones. On this subject, Lester is in a class of his own. – Alec Hogg

This special podcast with Rhodes University tax professor Matthew Lester is brought to you by BDO. I didn’t realise you are a BDO old boy Matthew….

Yes. I was there in my youth and they started my career as a lecturer so I owe them quite a bit and they’re great friends of mine.

Now you are making your life in Grahamstown at Rhodes University. How long have you been running the Tax Department there?

I don’t run the Tax Department there. I’m a visiting professor. I travel around the country. I talk to people and they tolerate me and allow me to teach there, which is very generous of them.

You’re also on the Davis Tax Committee, so that would give you a unique insight into a lot of the machinations in the Budget.

Yes. The Davis Tax Committee has some wonderful economists on it who have taught me a hell of a lot about the realities of this country and they need to be taken into account when you assess a budget.

Let’s assess this one. There’s been quite a lot of kick back from business, saying that government’s getting it wrong and that they are disincentivising the people who can get economic growth going. How do you read it?

Matthew Lester

Well, the wealthy did not have a good afternoon. The Budget is for 56-million people – not 100,000 people who earn over R1.5m per year. The big thing that we have to do is we have to do something. For the last eight years, we’ve done nothing but wait for economic growth to come back and it hasn’t. In the meantime, the population is growing far faster than the National Development Plan ever projected and we’ve got this becoming a social crisis. If you read Piketty he says, “This is what happens when there’s neglect.” Things like Marikana – people are getting impatient – 14,000 service delivery protests per year. We have to confront the reality. We have an enormous population. We have to keep them fed and we have to keep them safe, and there’s no growth. The criticism is, “Where’s the growth coming from? Where’s the plan?” That’s what people are hoping the Minister of Finance is going to do. I personally think that there are other ministers who should be contributing to that, particularly in education, in DTI, and SME and this is all labelled and blamed on Gordhan. I think that’s unfair.

Where is the plan, what did you get out of the budget speech that gave you some encouragement that there’s a track that is sustainable that’s being followed?

South Africa, for as long as I’ve been in the game, works on growth. Growth in South Africa comes from overseas, and there just isn’t that growth and with the uncertainty of Brexit and Trump and everything else we have to see where those growth trajectories are coming from. When we get growth from overseas, the growth will return in South Africa, so it’s not only of our making. I’m not saying that we help ourselves along the way and that we couldn’t do better, but we need more and we’ve had the National Development Plan since 2012 and nobody has read it, so yes, we need a plan, but that’s a plan from 56-million South Africans, not just one Minister of Finance.

Go back a little bit on that comment. The economy grew half a percent last year; it’s optimistically regarded that it can grow at 1.3 percent this year. That is unacceptable in a world that’s growing at 3.5 percent, and in China which even at its very slowest is doing 6.5 percent. It doesn’t seem like one can, if you say that you’re relying on international growth to pull you out, but the international world is growing faster than South Africa is.

Yes, well we have to get a commodity cycle going again, that will help, and we need to help ourselves. The rating agencies don’t help us with that (with this permanent thing hanging over our head about the downgrade), we don’t help ourselves with our own governance of our country, but more than everything else we need a plan and we don’t see that plan, we need a plan of epic proportions. This is where we missed the boat. Maybe ten years ago when things were good, we should have spent money and implemented plans. What did we do, we congratulated ourselves, gave ourselves a pat on the back, and just did nothing, so we missed the boat ten years ago and we’re paying for it now.

Yet, there is a National Development Plan?

There is a National Development Plan, it’s now five years old, its architect has retired from politics, and I don’t think many people have read it.

If they have read it, is that something that can be implemented?

I think it needs to be updated and I think when we see what the World Bank is saying to Parliament on the 15th of February. You’re creating 250 000 jobs a year on average since 2012, you need 600 000, what are you doing about it? Without growth you’re not going to get jobs, where is your growth plan, where are your incentives to do business in South Africa? To have a tax expenditure on corporates of R5bn a year, of which most is ETI and small business development corporation tax allowances, that’s just not big enough. We have to get more incentive; we have to make South Africa more business friendly.

Let’s talk about the details in the budget. The first thing that would have hit any external observer is the shortfall in revenue. If you have R30bn that you’ve budgeted to come in that doesn’t, as it has happened to Treasury in this past year (or at least that’s their estimate), then you are up a creek without a paddle.

SA finance minister Pravin Gordhan. Photographer: Waldo Swiegers/Bloomberg

Yes, that was swept aside in yesterday’s papers (other than to note that it’s there) and the big D-day on that is 1 April when we see what we actually collected per the Reserve Bank, not per estimates of SARS or National Treasury. Then we can have a look at what that shortfall is. What is important from the budget is that they did not change the increased tax base required even though there are these frightening numbers looking at the shortfall for 2017. So we kicked for touch to a certain extent on that and the D-Day is going to be 12 o’clock, 1st of April.

Matthew, when I had a look back at the medium-term budget in October, they were talking about a shortfall there of R22bn, so in four months it’s gone from R22bn to R30bn. It’s almost a 40 percent increase. Could it get even worse by the 1st of April?

I think all deals are off on this because what we’ve seen for years is a downward revision of about R10bn at the MTBF, which happens every year. Then a further downward estimate over the budget of another R10bn, which is normally made back by the 1st of April, so you go down R10bn a year. This year it seems to be a lot greater and not a lot of explanation is given. What does it do? I don’t know, but one must ask the question, if SARS is not making its budget, a lot of explanations are needed. That relates to governance at SARS, it relates to the tax administration at and how that’s working and the modernisation of SARS. Where is SARS going on extending the tax base and connecting everything that is due and is tax leakage increasing in South Africa?

Well, is it?

I think in the grey economy, yes.

What’s the grey economy?

The grey economy has emerged since 2009. South Africa traditionally has isolated our rural areas and our townships and taxed everything before it’s gone in there and that was fine when business in townships, etcetera was subsistence business. Since 2009, I believe that this has escalated far beyond subsistence business, which is good for delivery in townships; they can get much more, they can get it a lot cheaper, they don’t have to travel, that’s great. We have to say, “What is there, how much money is being made there, and is it being taxed?” It’s no good to simply say, “Well, the VAT system took the VAT before it got to a township and that’s okay”, that’s an old type of thinking. Where is the leakage? I think that there are many questions that need to be answered.

Do you have any idea what that tax gap is, in other words, the people who are not paying tax and should be?

There is much speculation about it Alec, but one of the most difficult things to assess is what’s not there and I think a lot of research is needed on this.

Education, that was a big story in the past year, Fees Must Fall, etcetera, is there enough being done on that?

Well, there are two aspects to it. The additional money for Fees Must Fall is allocated in the MTBF, not in the budget. In yesterday’s budget there’s a strategic mood on Section 10.1Q, which allows all employers to now get involved in helping the missing middle with tax free bursary payments. This is where business must react.

That sounds good, how does it work?

It means that if your employee earns less than R600 000 per year, you can structure a bursary for a relative or sibling of that employee into the employment package, thereby at least making the fees payable out of pre-tax income. That can be a saving of up to 30 percent in the fee structure and it is the type of assistance, it’s meaningful money that we need to have, but it has to be facilitated by the employers. We can’t just have everybody in the missing middle saying, “Oh, university fees are tax deductible”, that doesn’t work, it can’t be enforced.

Cartoon courtesy of Twitter @brandanrey

What we have to do is have a change in corporate thinking here and say, “Our employees are stakeholders, one of the reasons that they work is to educate their children, Piketty tells us that there is nothing that achieves a greater multiplier than education, so if there is a contribution to be made to society by the corporate sector, it is by getting involved in what is going on with tax-free bursaries for the missing middle and we can leave those below 150 000 and it’s going to come to their help. There is lots of extra money there and I’m afraid you’re not wealthy if you earn more than R600 000 a year, but there’s nothing there for them . But yes, we’re making some progress, I think, on Fees Must Fall. And we’re going to need the business sector to get involved.

From a practical perspective, if you’re earning up to R50 000 a month, you are sending your children either to university or to a model C school, say if you want to do that. What does that person who is now paying for those school fees out of after tax income, what can they do to make their package more efficient?

It’s up to your employer, they have to bring in a bursary policy, they have to facilitate the payment directly to the school or university, and they have to get involved. If you’re going to leave the employee out there to fry and pay the fees themselves, well then there’s no tax break.

The employee must actually go to the business and say, “Hey, if you don’t know about this thing, implement it now because it will make a huge difference to me”.

No, Alec, the board of Directors, if they are going to do more than paying lip service to corporate governance, have to put an item on the agenda, the education of our employees’ children and then we have to get the policies in from there.

You’ve mentioned Piketty a couple of times in this discussion, are you a fan?

French economist Thomas Piketty

I like dreamers, yes. You know, they always say I’m the most socialist chartered accountant in South Africa, but there are many things that need to be done. If Piketty and Atkinson have achieved things like bringing awareness, that is an important thing and the whole growth in your value of your portfolios is greater than your trickle down effect on government intervention, that’s great. What it’s done is brought awareness. I’m not saying that there are remedies such as international wealth taxes, etcetera, I don’t go along with that, I think that’s pie in the sky stuff, but that it is bringing awareness to the idea of the social debate in business, I’m all for that.

You mention Atkinson, which seems to be Pravin Gordhan’s new Guru (Tony Atkinson, who died in January this year, aged 72, Oxford Professor); do you know much more about him?

Well, he’s done an extraordinary amount of work over many years. Piketty’s in his forties and a lot of the work of Piketty is standing on the shoulders of Atkinson. Some people say Piketty is Marx rewritten, I think in some respects it’s Atkinson rewritten. He’s an extraordinary man, but we are looking at ideals relating to the inequality debate, which is very important. How we get that into tax policy is a different thing and we saw all the draconian taxes in the UK through the sixties, seventies, and eighties, they didn’t work, even Heath has admitted that. In later years he couldn’t actually justify what their pipe dream was all about, so yes, we have a lot to learn on that still.

Both Piketty and Atkinson, these gurus that Pravin Gordhan is now basing South Africa’s future on, worked in first world economies, do they apply as well in a developing country?

Well, no. One of the fundamentals (and even Piketty says this), is his work and his suggestions are based on economies such as France and America where the population is not growing very fast. In South Africa, we have a population growth rate which is far faster than your economic growth rate at present and I’m not saying all deals are off when we talk Atkinson and Piketty, but they’re very different models when you come to Africa.

That is really addressing an issue that was completely ignored in the budget, HIV AIDS. Is it something that should be taken off the table?

I’m appalled by the whole situation. You know, it seems that just because the HIV death rate has dropped from 50 percent of all deaths in 2006 to just below 30 percent today, that it’s all okay and we can talk about sugar tax. That’s absolute rubbish. We’re still having a 150 000 AIDS deaths a year in South Africa, there are 330 000 new infections a year, and there are more than seven million of the population who are HIV positive. It is cold comfort to them to say that they can now all get ARV’s, we don’t even know if they can because often the clinics are out of stock. We haven’t dealt with that problem, it is still a ticking time bomb, and it’s incredible to me that we are talking sugar tax when we haven’t even gotten anywhere near sorting out the AIDS crisis.

There would be some saying that it’s incredible that we’re taxing the productive sector of the economy when we haven’t got economic growth.

It’s desperate times and desperate measures.

Is there anything in this budget that when people reflect, they can see that it is a step in the right direction?

Yes, as I’ve said before, we’ve been our own worst enemies for years and we missed the boat when times were good. I always like to leave it on the point that I’m amazed this country is still here and still holding together. If all South Africans could get together and get behind the Minister of Finance, including his other cabinet ministers, we can make this work. We’re our only limiting factor; it’s just going to take a lot of effort.

Matthew Lester, Tax Professor at Rhodes University and this special podcast was brought to you by BDO.