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Jeremy Maggs: It's Budget Week and conventional wisdom suggests that the Finance Minister (Enoch Godongwana) has little real wiggle room. Citadel Chief Economist Maarten Ackermann has some thoughts on what could be announced later this week. First of all, Maarten, welcome. Thank you for your participation. How can ministers think about managing spending?
Maarten Ackermann: Hi hello. It will definitely be a tough budget for the minister. We are starting with a budget that is under a lot of stress, given the state of the economy and the expenses that need to be put in, as well as the lack of income. But more than that, we have to bear in mind that this is an election year and the ANC is under intense pressure, so we want to keep that in mind when it comes to announcements.
So how do you cut expenses? That's probably the most difficult part of budgeting.
The income side can be solved by doing a few things, but on the expense side, one of the biggest expenses right now is wages. How can you reduce this in an election year, especially when: You don't want to lay off a bunch of public sector workers? So it's not easy.
And the other thing is that we are still saddled with social subsidies due to COVID-19, but at least from a social responsibility perspective, given the weak economic growth and high unemployment rate, it is important that the government This means that it is extremely important to continue paying subsidies. One thing the country cannot afford is for those people not to have that income, or for that income to be inflated. So cutting expenses is probably the most difficult thing to do. Especially, as I said earlier, in an election year, I want to keep my promise to the many people who will vote for me.
Jeremy Maggs: And I know that there is currently a lack of income. So where should you look strategically from a tax perspective? Again, keep in mind that we are in an election year.
Maarten Ackermann: That's the other difficult part. Will there be a big tax increase in an election year? Well, I think the government is in a tight spot, so maybe there will be some tax increases.
From a personal income standpoint, I definitely don't think we're going to raise taxes, but we're definitely going to raise the income tax range, the creepy range they call it.
So instead of physically increasing the percentage you pay, make sure these allowances stay in line with inflation. So it will definitely happen.
Secondly, there is a lot of discussion about a possible increase in VAT (value added tax). So let's unpack it a little. The advantage of raising VAT is that the impact is felt immediately, starting the next day. The government and the Treasury pretty much know what they're getting. This is very different from, say, raising capital gains taxes. Because if there was a capital gains tax, investors might think differently about the implementation of that tax. Therefore, there is no guarantee of how much money you will receive.
When we compare South Africa with the rest of Africa, our value-added tax rate remains below average.
So the government, even in an election year, says, “We're in a bind, we don't want to cut spending, the economy isn't really growing as much as we'd like it to yet.'' It can be argued that. As we grow, we are considering VAT to generate additional revenue.
Jeremy MaggsBut that would be political suicide, especially among the ANC's core constituency, which is largely poor.
Maarten Ackermann: you are 100% correct. But again, VAT would at least give us the opportunity to say we can add more zero-VAT products to that mix. That means taking care of the poorest of the poor, or low-income consumers. Even if you want to go that far, you can say that if you buy a particular car over a certain limit, the VAT will be doubled.
So, using Vat, you can ensure that different income levels are taxed differently in terms of where they spend their money. So it all depends on how you package it.
Jeremy Maggs: Maarten, we have been hearing governments talk about rationalizing state-owned enterprises for some time. Again, a very unpopular topic. Do you think there is a possibility that the Minister will reflect on that?
Maarten Ackermann: Are you talking about privatization?
Jeremy Maggs: It's not about privatization, it's just about rationalizing, paring down, and streamlining.
Maarten Ackermann: Yes, that's one of the big (particles) on the ficus. We know it's been going on for years. We talk about big companies like Eskom and Transnet, but basically they're all 700 companies. Most of them are looking for money and have no intention of actually adding production capacity to the economy. So I think the fact is that big companies have failed over the last few years and unless they provide one bailout after another, we're not seeing any results.
The Treasury is reaching its limits, and the last two Budgets have clearly shown that the road is no longer open and we need to run like a proper business or find an alternative. think.
Also, now that the private sector is entering, for example in the field of alternative energy, it is already clear that some of the improvements in electricity supply can be achieved beyond state-owned enterprises (SOEs). So I think we're stuck in terms of the Treasury just providing an additional lifeline if state-owned enterprises aren't performing.
Jeremy Maggs: And another issue that people would like to see more clarity on is how to fund the NHI (National Health Insurance).
Maarten Ackermann: Well, I also think that the current national insurance system is a political promise in an election year. There's nothing wrong with the idea behind it, per se. We're seeing that in many other countries as well, but it's about the actual rollout and the financing of it. When you think about your personal budget, if you're in a tight spot and want to do something you've never done before, you'll need to get the money to do it from somewhere. I think probably the biggest headwind right now is the fact that we can't find enough funding to actually make it work.
Jeremy Maggs: Well, all will be revealed later this week. Thank you very much, Maarten Ackermann, Chief Economist at Citadel.
