Higher taxes coming – rich being targeted
South Africa's Treasury is walking a fiscal tightrope, says Futuregrowth's Wikus Furstenberg, which means there is a good chance of significant tax increases in October's Mini Budget – if not then, definitely next February. And with the Davis Commission having opened the door for a step change in the State's tax take, politically vulnerable groupings, especially the wealthy but also companies, look to be in the firing line. AH
ALEC HOGG: This undictated special podcast is brought to you by Futuregrowth Asset Management. Wikus Furstenberg is with us on the line from Cape Town. We have the Mini-budget just around the corner, Wikus. Have you done any work on it yet?
WIKUS FURSTENBERG: Alec yes, I think it's an ongoing thing. It's not something we focus on specifically, as we get closer to the date (in this case, the 22nd of October), but yes, we've been looking at it since last year. Like most in the market, we're clearly concerned about ongoing fiscal slippage.
ALEC HOGG: The economy has been struggling. We've had the strikes, so this fiscal slippage that you talk about: is that primarily on collections?
WIKUS FURSTENBERG: There's a bit of revenue underperformance and obviously, as you know the monthly data that we get tends to be quite volatile. There's some seasonality in that as well but clearly… We all argued that Government, even in previous years, were too bullish on their growth outlook and in particular, at the beginning of the year for 2014 as well, so there's an issue there in terms of revenue underperformance. We filled some of that into our numbers and here and there, we hear pressure from certain ministries – maybe defence or police etcetera – for increased spending. We're also concerned about the wage negotiations in the light of the recent strike action and inflation peak of six-point-seven percent a few months ago doesn't really help does it. The big thing is about that difficult balancing act around the SOE's, particularly Eskom's filling model.
ALEC HOGG: What did you make of the announcement that came out from Cabinet about Eskom this week?
WIKUS FURSTENBERG: It's a bit confusing because there are two parts. There's the equity injection – the magnitude of that is still undisclosed. They mentioned something about funding it from "non-strategic Government assets". Now, we looked around and maybe we're missing something, but we can't really see anything that size that can be sold easily. I don't know whether I'm missing something. This obviously means there's going to be some sort of potential direct impact on central Government finances. They either have to draw on that contingency reserve of theirs, which is now down to about R3bn – and that's small – so there are many question marks around that particular issue (the equity injection). I guess we still have time, but still…
On the deck side, they indicated that Eskom would be raising an additional R15bn obviously over the next period until 2018, because the funding gap obviously applies to that period – out to 2018. There's an indirect impact because it's supported by an explicit Government guarantee and that obviously means that Government's contingent liability is going to increase.
ALEC HOGG: We're in an interesting situation because we have a Government here that wants to grow employment but doesn't realise that every time it grows employment through the public sector it's in fact just adding to its costs.
WIKUS FURSTENBERG: For sure. It's almost as though there's this jobless growth trap. At the same time, we have stretched fiscal metrics and that's almost like cords on a slippery slope. In 2008, we had scope. Government was running a very small deficit and just before that, a small surplus so that Scope could do something about the expected [inaudible 04:11] or whatever was on its way because of the 2008 crisis and we're currently in a very different spot. That worries me. It's almost as if growth is hurt by cutting back on job growth and/or raising taxes because at the end of the day, it seems as though Government will be forced to raise taxes. Now, we all know about the Davis Tax Commission, what he's been saying, and I think we all expect some sort of tax increases in February next year. That's probably inevitable, otherwise we're going to get ourselves back into a corner here.
ALEC HOGG: I was reading a very interesting piece that Azar Jammine put together for his clients after meeting with Treasury on Friday. One of the things he says that came out of that was that Treasury seems quite comfortable now in raising taxes for the rich. They were talking about a Super Tax on people who are at the top end of the bracket.
WIKUS FURSTENBERG: Yes.
ALEC HOGG: What you're saying is something's coming in February, but might we even see something on that sector of the population even sooner?
WIKUS FURSTENBERG: No. It's possible. Typically, we don't see these really big announcements with medium-term budget policy statements, but I don't think we should be surprised if we see something. That four percent deficit for the current fiscal year is obviously at risk for all the reasons we mentioned, so the sooner the better. It's not just high-income groups or groups with the Super Tax, but I guess we should probably keep in mind that they might look at higher capital gains taxes, dividend taxes, and estate duties. There's a move that carbon tax could be implemented at the end of January 2016 and we don't want to talk about the VAT increase, do we. It's probably only a long-term possibility. I would think especially if the National Health Insurance program gets going and needs to be funded. However, I don't think they would be prepared or need to go there now for reasons you mentioned. It's easier that way.
ALEC HOGG: It's almost as though this Government is now painting itself into a little bit of a corner where taxes have to be increased when of course, higher taxes are not conducive to more economic growth, which of course expands the pie. If you were sitting in the Finance Minister's shoes, what choices would you have to make?
WIKUS FURSTENBERG: Well, I think it's very difficult. If we want to ignore reality, obviously the right thing would be to keep looking for efficiency gains, – not just in terms of revenue because they've been very good at doing that since many years ago – and that is to look at the expenditure side as well. I know there's talk of improved processes, cost controls, and accountability at particularly the provincial level. We haven't seen anything concrete, have we? That takes a while. Whether the Minister is in a position to cut expenditure broadly speaking, I don't know about that.We have all these promises and intentions but at the end of the day, that's also a political game and I think that's the reality. What's interesting is that Judge Dennis Davis has mentioned that the optimal tax GDP ratio for South Africa should probably be closer to 30 percent instead of the longstanding assumption of 25 percent.
That leaves the door open for the Minister to say 'well, that's what this Commission is saying and let's go that way for now, at least' and it makes it difficult. It has implications for growth and it has implications for the consumers as well.
ALEC HOGG: So the easy targets would be the rich, so we could probably assume (politically) that would be a nice option as well for those in power. They would be looking at some kind of a Super Tax or at least something on the rich. As you say, capital gains tax and dividends tax: those are likely to come, perhaps not in the Mini-budget, but definitely in February.
WIKUS FURSTENBERG: For sure. Maybe this system produces higher marginal income tax brackets and higher income groups – as simple as that. They don't even have to call it a Super Tax because effectively, that's what it is and it doesn't sound as aggressive as saying 'Super Tax on the rich' when effectively, it is. Even those capital gains taxes, dividend taxes, and estate duties…the higher income groups will contribute more in terms of those taxes. All of them giving bits and pieces may make a difference.
ALEC HOGG: And in the tax, the GDP ratio – if Dennis Davis is looking to edge that up or believes it can go from 25 to 30 percent – that as you say, opens the door.
WIKUS FURSTENBERG: Alec, it's a suggestion but that suggestion is timely. It helps at the right time. That's what we want to hear because it does make things a little bit easier in terms of doing that.
ALEC HOGG: Highly digestible politically for those who make the rules… Wikus, just to close off with, are you then anticipating in the Mini-budget on the 22nd of October, we will indeed see tax increases?
WIKUS FURSTENBERG: Alec, if not the 22nd then certainly, in February next year.
ALEC HOGG: Wikus Furstenberg is with Futuregrowth and this undictated special podcast was brought to you by Futuregrowth Asset Management.