Share

Budget 2015: AJ Jansen van Nieuwenhuizen – Nene’s got a tough road to walk

Tax expert AJ Jansen van Nieuwenhuizen from Grant Thornton joined Alec in the Biznews studio to discuss Budget; whether Nene realises just how tough his job is going to be to balance in the coming years, that past mistakes are wiser not to be compounded upon, and that the only way out of the morass is faster economic growth.

We’ve done a few tours around the country in the past, looking at the budgets.  We’re not going to be looking at this year AJ, but that doesn’t mean you aren’t going to be paying attention.

Definitely not.

There was reason to be fairly optimistic a couple of years ago but every year, we seem to be doing more of the same and we see to be getting tighter – less breathing space.  This year, they’re talking about R12.5bn that needs to be raised. Where does that come from?

Firstly, Alec we go back to the previous years’ Ministers. In hindsight, Manuel and Gordhan had it rather easy. They had their roles in relatively easy economic spaces. I think Minister Nene certainly has, arguably the toughest budget speech since democracy in the last 21 years. I think that if you look at the trend, over the last couple of years, at a more economic level, we certainly have a deficit, which is increasing year by year. We have the balances getting larger and larger (the deficits), and with that, the space to move fiscally is getting tighter and tighter, from the Minister’s perspective.

Let’s just slow down there a little bit. When you say ‘the deficits’, is that having a household budget that, your income is not matching your expenditure and it is getting bigger and bigger?

Perhaps even worse, and I think ‘what I’m doing in my household’ analogy, is I’m going to the bank and borrowing a million Rand to take my wife to Mauritius, yet I haven’t paid for the kid’s education, I haven’t invested for the future. I think that is probably the best analogy to use.

That’s a bit concerning. Are we still on the same track, given that this is the toughest budget, as you say, in 20 years? Might there be any difference?

Alec, I think the trend is still continuing and I think on the mid-term budget we saw forecast that we were to continue, the debtor GDP ratio would increase over the next two to three years, before it stabilised. That was done on the basis of forecasted GDP growth in the region of two-and-a-half to three percent. Obviously, we’re getting nowhere close to that at the moment, so anything under two percent means that we are still spending at that level. We are still borrowing at that level. We just don’t have the means or the economy to generate the income to service that amount, or to bring those percentages down.

That R12.5bn that’s being thrown around as the number or the gap that Nene needs to close. Where does that come from?

Unfortunately, the Minister is going to look for that R12.5bn from you and I.  Whether that’s directly through personal income tax increases or through other measures, he needs that additional revenue.

Why?

Well, I guess first and foremost, before we go into where he’s going to get the money from, I think it is important that, and I would certainly want to stress the point, that they should be looking at the spending before we start worrying about the revenue.  I’m confident that there will be many areas in the Budget where we can find an R12.bn saving, where we don’t need to spend that money or we are spending that money fruitlessly, without getting the appropriate returns on the money we’re spending.  Everybody knows that every week there’s another story about Government wastage, etcetera, so there are certainly a lot of areas where they could cut down on expenditure, and wasteful expenditure more importantly, to fund that R12.5bn.

That doesn’t look like it is going to be the priority this year.

Yes, I think every year, whichever Minister of Finance it is, makes certain comments about their initiatives to curb corruption and wasteful expenditure, etcetera, but I think as much as their intentions are very noble, I don’t think there is holistic buy-in from his fellow Ministers, from the other Departments.

I got really excited when the procurement SAR tsar? was going to be appointed, and indeed has been appointed, but we’ve heard nothing from that.  The idea there was they would have one rate for all Government.

I think that was about two or three years ago, and yes, nothing has come about since. We haven’t heard about anything of how effective it’s been, so I think if we say that there is no room to do anything wrong, then let’s go back to where he’s going to find the money.  Corporate taxes are the no-no.  At 28 percent, we are already too high.

‘Too high’, relative to what?

Relative to global averages, so an average corporate tax rate would probably be in the region of 22% to 24%, arguably, depending from one region to the next.

What would happen if you jack that up, and companies would presumably leave, to go where they pay less tax?

Simplistically, yes.  I think, obviously where companies pay tax around the world is a very topical issue at the moment, with the base erosion and the profit shifting initiatives. We really don’t want to chase people away. I think we have enough other challenges, which detract from investors’ willingness to come into South Africa. We don’t need to make our lives even more difficult by upping the corporate tax rate.

All right, so corporate is off the table.

Corporate is off the table.  Personal income taxes, obviously we have a progressive tax system.  A lot of speculation around maybe the top individual rate could be increased, so maybe for people earning over R1m taxable income, you could take their rate from 40% to 45%.

As much as that?

It could be lower, maybe 42% but again that is not going to give us that much additional revenue. What you’re doing is you’re further alienating and almost targeting a very small group of taxpayers, who are critically important to the success of this economy. What you’re doing is you are taking away from them the ability to spend money in the economy and to really, get this economy going, at the end of the day.  I wouldn’t be proponent of a 45% rate. If we have to increase something then maybe go for 42%, which is a compromise.

That looks like being targeted, given that it is politically acceptable, in fact it is popular.

It is popular.  I think that is perhaps one of the big challenges, is that what is happening here is that a lot of decisions are not necessarily made on economic principles and sound thinking.  A lot of them are driven by populist theories, so where could we potentially maneuvre, which at the same time will tick the box of being politically popular with our voter base? Certainly taxing the wealthy at a higher rate would come across as being a very populist move.

So that’s almost certain that we are going to have an increase in the top, marginal tax rate?

Certainly, I think that that is probably almost a given. Other areas are it might impact on the individual. Maybe an increase in the CGT rate or the inclusion rates for CGT. I don’t think that is going to work because that is very sporadic. That depends on people disposing of assets, so you are unlikely to get a consistent revenue stream from playing around with the estate duty or with CGT rates, as such.

How does South Africa compare on Capital Gains Tax, to other parts of the world?

I would say, on average, more or less the same. The mechanisms behind CGT are not significantly different from one jurisdiction to the next. The inclusion rate principle is also not significantly different. Some jurisdictions have no distinction. That capital is still 100 percent but by enlarge, not a significant distinction, as such.

So a little bumping-up there is not going to really, put us out of line?  

It is not going to give us significant additional revenue, at the end of the day, so in terms of the amount of CGT collected every year, you are not going to find a significant contribution to that R12bn we’re looking for.

What about dividend tax?

Dividend tax again, at 15% that is pretty much an average for the world.  To start playing with that is also akin to playing with corporate taxes.  You don’t want to discourage investment, so I don’t think there is any room to play with dividend taxation.

The big one, of course is the petrol or the fuel tax.

I think the indirect taxes are the areas where there is some room to manoeuvre, so the fuel levy is an easy one. I think where we are at the moment, with price per barrel at about $60.00 or something.

It is under $50.00 today.

At that level, I think there is room for the Minister to possibly add, a bit more than what he would have added, in the past.  That is going to make a small contribution.  I think some calculations done by certain people, would say that an increase of about 30 cents in the fuel levy will give an additional R5bn or R6bn.

That’s halfway, 30 cents a litre more for petrol and diesel, and you are halfway to that R12bn gap.

Obviously, when the oil price goes back up to where it was a few months ago, that’s where you are going to feel the pain a bit more, but that is also a fairly, broadly indirect tax base.  You are impacting a lot of different people.

Are there any other areas that you would highlight as potential areas of concerns?

The elephant in the room would be VAT, so I think, again coming back to a political agenda, outweigh an economic principle.  VAT at 14 percent is quite low, compared to the global averages. They are probably more around 19% to 20%, so we certainly have room to manoeuvre.  Now, the argument always is that an increase in VAT will disproportionately impact on the poor. Looking at it simplistically, yes, it will but if you go about that by increasing the basket of exempt goods, that softens the impact a bit more.  Perhaps introducing a deal rate of VAT, so maybe take 14% to 14.5%, and then introduce another level of maybe 18% on super luxury goods.  The individual that has the need to drive a Ferrari, he wants to drive that Ferrari regardless of whether he’s paying 14% or 18% on that particular vehicle.

Do you think that’s conceivable; given that Cosatu is so against VAT that we’ll have any change on that side?

Again, that comes down to the political will, and I think for the Minister to take a step back and look at what he has available and what he can do with the various means he has, it would take a very bold Minister to move on the VAT, although it makes all the sense in the world. Certain studies have shown that the impact on the poor is not that bad. It is fairly progressive as well. You and I would spend more money in the economy and, therefore more VAT because we have more disposable income versus the poorer person.

The concern in all of this is that there is room, from the way you’ve unpacked it this year, but what happens if the economy, and we’ve been told Eskom are going to be having problems for the next five years. If that puts a cap on economic growth, and we certainly haven’t readjusted to a one to two percent growth rate in this country.  What happens next and the year thereafter, and the year thereafter?

There is only so much you can squeeze out of the tax space and the more that the economy is suppressed and not growing at the level that it should be growing, obviously, you are not going to be collecting the corporate taxes. You’re not going to be collecting the VAT, etcetera.  Again, I think it is important for the Minister to come back to his holistic budget, and not just look at the revenue side. He must look at the expenses side. I think the time is right for them to seriously, take a look at some of the State-owned assets, and, again, I wouldn’t suggest that they dispose of Eskom, so that they can use that money to pay the public workforce. There you would want to strategically dispose of those sorts of assets. Get a lot of money, settle the debt or reduce the levels of debt, earn some royalty stream out of the transaction. Looking at SAA, once again, pushing another couple of billion in there, and R23bn into Eskom. That’s not sustainable and as long as the underlying business models of the organisations that Government is putting money into, year on year, doesn’t change. We’re just making that hole bigger and bigger.

AJ Jansen van Nieuwenhuizen is with Grant Thornton, and this podcast was made possible by BrightRock, the company that introduced the first ever needs matched life insurance. 
* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.
















We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.98
-0.4%
Rand - Pound
23.99
-0.4%
Rand - Euro
20.52
-0.3%
Rand - Aus dollar
12.36
-0.1%
Rand - Yen
0.13
-0.4%
Platinum
900.15
+0.4%
Palladium
1,000.00
-0.2%
Gold
2,213.05
+0.8%
Silver
24.68
+0.2%
Brent Crude
86.09
-0.2%
Top 40
68,237
+0.8%
All Share
74,414
+0.7%
Resource 10
57,122
+2.6%
Industrial 25
103,714
+0.4%
Financial 15
16,494
-0.2%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders