High tax, low revenue, weak economic growth

WARREN THOMPSON: On Wednesday, October 25, finance minister Malusi Gigaba will present the mid-term budget. As a precursor to that, I am joined by Lesiba Mothata, the executive chief economist at Alexander Forbes Investments. Tell me, Lesiba, is Mr Gigaba a magician because it looks like he has got big problems with being able to generate enough revenue to keep the government books in line, tell us your thoughts around how much shortfall he’s going to have to deal with come the end of March 2018 and then what you expect him to do in respect of getting that growth going and perhaps doing something about these costs.

LESIBA MOTHATA: Clearly it’s a challenging context for him; the global economy is struggling to get back to high growth levels, domestically there isn’t enough revenue generated out of VAT, personal income tax and corporate taxes, so he’s likely to be faced with a hole or a gap of about R40 billion, which is US$3 billion. He’ll need to plug the hole by doing a couple of things, which he can in terms of income tax, he could do a few things on tax. So I’m afraid it’s going to be a high tax budget, a low revenue outcome and even weaker economic growth going forward.

WARREN THOMPSON: Some have indicated that obviously in light of the economic headwinds that the country is facing that percentage of GDP, what we call the budget deficit, which is the difference between government revenues and government spending is now set to increase towards March, more than what was planned in February this year, just sketch that out for us.

LESIBA MOTHATA: What normally happens is because they have the authority on the tax area they can decide to hike taxes and make that number look better, which is what happened in February, there were a few taxes that were introduced and we began to see that budget deficit beginning to go to 2.1%, 2.3% and then 2.8% over the three-year horizon. But these numbers are likely to be challenged now and we may even see a slippage of up to a percentage point from all the numbers that we’ve seen in February because of the [2:25]. Even if he can hike taxes there’s a need for substantial economic growth so that he can eke out more out of personal income, VAT, corporates, even if he hikes taxes. So I’m afraid that number will show slippage of about a percentage point, so we’ve been talking about a budget deficit of about 3.8% is possible.

WARREN THOMPSON: You said 3.8%?

LESIBA MOTHATA: Yes.

WARREN THOMPSON: Okay, so what are his levers now? We desperately need growth, we’ve got structural unemployment that almost gets forgotten about but we’ve now got an economy that’s not growing as fast as we’d all anticipated and that’s had this massive effect on the revenues. What can he do to get the growth going?

LESIBA MOTHATA: The growth requires a few things, there are still things that can be done from the fiscus, one thing is to introduce confidence and what has eaten up confidence right now is state-owned enterprises, notwithstanding the area of confidence, the actual shared  drainage of capital that they introduced, he had to solve for them, he has proposed that he will, he has promised so much that he will deal with state-owned enterprises to make sure that these guarantees that we’re seeing [3:43] that we have seen in the last three years is that they have been increasing, as opposed to decreasing. We need to see a plan that they will decrease. If you do that then you are solving a lot of the fiscal issues because a rug needs to be pulled out from under these state-owned enterprises to make sure that they are exposed to market forces and they, not the government, but they, the state-owned enterprises save shortfalls, they need to save capital shortfalls so that we can talk about how we solve their issues. In there, there will be a very different conversation than if we were dealing with a state-owned enterprise, if it’s going to be borrowed money, if it’s going to be private capital, is it going to be a different risk structure because that way we can solve it. But it is them that need to be exposed to shortfalls, not the sovereign.

WARREN THOMPSON: Absolutely, I concur with that the whole way. What about cutting costs, Lesiba?

LESIBA MOTHATA: Well, there have been plans and we hope to see if they have been implemented. Remember, in February it was clear that they will not have wastage in terms of expensive flights or be in business class all the time and also all these consulting fees that have been taken out by private firms that do consulting work in government, there’s been a few lists of what they were doing, including the wage bill, to make sure that they decrease head count through natural attrition. But where we are now perhaps natural attrition is not the only solution, a lot more needs to be done [5:15] but we need feedback, these plans have been put out, we need to see if they are yielding fruit, what has been the outcome. Hopefully the minister will be able to tell us that because that will introduce a bit of confidence if it is working.

WARREN THOMPSON: All eyes will be on Minister Gigaba there to see whether, first, he can introduce the confidence Lesiba spoke about and, secondly, whether they are sticking to the cost reduction measures that they undertook earlier. Lesiba, it’s been great speaking to you, I hope to touch base with you shortly and get your opinion on what was delivered on Wednesday, so I look forward to that in the future.

LESIBA MOTHATA: Thank you so much, I’ll be in Parliament at the lock-up to see the actual papers that come out, so I look forward to chatting about some of the ideas after that.

WARREN THOMPSON: That was Lesiba Mothata, chief economist at Alexander Forbes Investments.

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