What can we expect from the mid-term budget?
Ian Matthews from Bravura says government cannot afford to make too many noises in any particular direction right now.
With Mr Mboweni considered a safe and qualified pair of hands, business and market players are not expecting him to veer far off recent original budget scripts, and major policy shifts are not expected. Or – could we be surprised?
Well, to share his insights on the mid-term budget and what he considers to be the important policy environment to attract investment, I’m joined on the line by Ian Matthews, the head of business development and special projects at Bravura.
Thanks very much for joining us, Ian, as always. Mr Mboweni is delivering the mid-term budget speech in a heavily-constrained economic context, where growth appears elusive, unemployment is one of the worst in the world, and government has a long line of state-owned enterprises still looking for financial backing from the state in order to stay afloat. In this context, what are some of the key issues we can expect him to address?
IAN MATTHEWS: First, thank you for having me on the show. I think among the key issues that he faces is the issue with regard to revenue and the ability to recover taxes that meet what is an ever-growing expense bill. I think the last time I saw, if you talk interest and sale expense, you are looking close to 60% of the current expenditure budget being taken up by that. So I think the first thing the minister is really going to have to think about is how to contain costs, and, secondly how to ensure that his revenue targets are met. Therein lie probably the two issues.
One is Sars having gone through a traumatic period – I’m not pointing fingers, just saying it has gone through a very difficult period over the past couple of years, having failed to achieve a number of the targeted revenue numbers. The second, as you point out, is the state-owned enterprises being a big drain on government finances, to such an extent that I think, in the number I’ve currently seen, the total debt by state-owned enterprises, which is guaranteed by the government, is something like R460 billion. Those are big numbers to the extent that they somehow land up on the government balance sheet. For whatever reason, that I think would be devastating to government financial policy.
NOMPU SIZIBA: In terms of the SOEs, we’ve heard it raised before, but do you think we are going to hear the P-word spoken about more strongly in the mid-term budget, because obviously in the long term it’s really not sustainable that government keeps on bailing out these state-owned enterprises?
IAN MATTHEWS: I think you raise a very important issue. And also, taking into account the investment meeting on Thursday, you really have to think how government is going to support growth in the next couple of years in South Africa. It doesn’t have the capital to do so, and it’s under great pressure to bring its debt down. So where does that come from? One therefore probably sees government having to look more at public-private partnerships, potentially, as you say, the P-word, privatisation, to some extent, of certain functions. The prime candidate for that must be Eskom. It’s a major importer, and Eskom may have to be somehow restructured in a way which allows government to raise capital for purchases of investment into infrastructure, and consequently job creation, in future.
NOMPU SIZIBA: We are not expecting any tax-policy announcements tomorrow as such, but maybe a hint of where Treasury may try and look to raise more revenue? In your view, what are the possibilities and, even if there are possibilities, would they be sufficient to make a dent in addressing some of the recent revenue shortfalls?
IAN MATTHEWS: I think there are two points to that. The one is no, for the fact that he supports a wealth tax, which he may or may not wish to put forward as a alternative. But that in itself is not a long-term strategy that is sustainable.
The other side of the coin is what about increasing income taxes? Well, South Africa on the corporate side has one of the highest tax rates in the world. And, from what I can gather, the numbers for income tax on individuals have been increased materially, despite our tax rates having been increased to 45%. So there doesn’t seem to be much runway.
On the individual side and on corporate tax as well, you are really having to compare yourself with the UK at below 20%, the US at 21%, and the rest of the world going down, while we are at the top end of the strata. And thinking, for example, of Australia, which has been our sort of benchmark for a while at 30%, they are also talking about reduction of tax rates going forward. So we seem to be alone on an island at the moment.
NOMPU SIZIBA: What do you think about government’s plan to redistribute or reprioritise R50 billion worth of the budget? Isn’t there a danger that perhaps, if it does that, other imperatives will actually be pushed to the margins?
IAN MATTHEWS: Well, one would be that reprioritisation of funds or re-application of funds into different areas will have a positive effect on the economy. But I guess the concern that one has is that it probably isn’t enough.
NOMPU SIZIBA: While the country’s numbers are important , the policy framework of the country is also key and, from where you are standing, there remain far too many outstanding policy issues, which don’t look like they are going to get clarity any time soon. Just speak on those, if you will, and also just tell us – because we haven’t spoken to you since Mr Ramaphosa decided to appoint those 10 panellists around the whole agricultural sector – whether you think that’s a good idea.
IAN MATTHEWS: I think that’s great. There are individuals there who are highly regarded and respected globally, and I certainly believe will be successful in bringing longer-view investment to South Africa. However, we are certainly not making that task any easier through issues such as, for example, expropriation without compensation because, by definition, policy certainty, investment certainty, investment protection are the key things that makes it work for investors.
I think PwC in the past couple of days issued a report on what makes investors come to South Africa. Some of those numbers that they put out there were rather disturbing, I think. As a percentage of GDP over the past years we’ve dropped from 1.5% down to about 0.5%. I do think that policy uncertainty, which has crept into the state, into certainty of the law, security of investment, will in may ways probably make foreign investors reluctant to invest in South Africa.
NOMPU SIZIBA: When it comes to the rating agencies, Moody’s has been less trigger-happy in pulling the junk-status trigger on us. But Standard & Poor’s and Fitch have been very ready to do so. They have us in junk status already. If the mid-term is read in positive terms, could we see upgrades from the likes of Standard & Poor’s and Fitch, do you think?
IAN MATTHEWS: I don’t think in the short term. They will probably stick around where they are for the moment. A positive message coming out in the mid-term will probably keep us out of junk status with relation to Moody’s, but in relation to the other two, I think they will probably keep their powder dry for a while.
NOMPU SIZIBA: And then the other thing– it’s something I’ve discussed with a number of people with the election around the corner – that policy certainty that you keep on talking about might be tricky to get. Also, when it comes to the February budget, I’m sure the ANC government would be very careful as to what sort of policies it decides to push through at that time.
IAN MATTHEWS: I think you’ve got to accept that nothing will happen materially over the next months until we get past the next election. I think government can really at this stage not afford to make too many noises in any particular direction.
NOMPU SIZIBA: Thanks very much, Ian, for your time.
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