Finweek_English_Edition_-_March_19,_2020__

fundfocus Q&A

@finweek finweek finweekmagazine finweek^ 19 March 2020^23

SA ECONOMY

By Leon Kok

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eon Kok spoke to Efficient Group economist, Dawie Roodt, who

has been outspoken on the 2020 Budget. The interview was

based on Roodt’s presentation to the Free Market Foundation in

Johannesburg.

What’s your overall assessment of SA’s public finances

following February’s Budget?

The country has entered a fiscal debt spiral and only an extraordinary

attempt, or luck, will get us out of it. This, of course, is largely due to

pitiful public management; it’s getting worse and will

inevitably evoke greater pain. We’re almost certainly

headed for further rating agency downgrades. Very

little in the public sector works well.

What are the major problems?

A president loathe to deal with the deteriorating

situation; government leaders who are out of their

depth and at odds with the country’s best interests;

the governing ANC whose objective is to live off the

state and only look after its own interests; an addiction

to debt; education is a disaster; and labour relations

are toxic. Given that our political leaders are averse to

controlling state spending and hence the fiscal deficit,

all we can hope for is stronger growth, which is unlikely

to materialise.

Let’s focus on the debt situation.

Government plans to spend R1.9tr while raising just R1.54tr in

revenue, leaving a budget deficit of about 6.5% [of GDP], rising to

6.8% next year, before falling to 5.7% in 2022-2023.

Our total fiscal debt is currently equal to 60% to 65% of GDP and

there is no sign of government seriously reducing state spending. On

the contrary, it’s committed to borrowing more, and fiscal debt should

exceed 70% in the next three years.

Mind you, that excludes Eskom, effectively pushing it up to 85%.

All and sundry seem delighted that there were no significant tax

increases in the Budget, but the underlying implication is that our pain

is simply being postponed into the future.

Government’s greatest fear is that if it puts the brakes on fiscal

spending now, the economy will go into (a deeper) recession with

serious political implications. It consequently feels compelled to

pursue an expansionist policy by pushing more and more money into

the system.

Reducing the public service wage bill?

Minister Mboweni hopes to slash this by R160bn over the next three

years but it’ll involve the immediate reopening of the three-year wage

agreement currently in force. Cosatu has already indicated that it will

take the matter to the streets. Keep in mind that this does not mean

“reducing” the wage bill, it simply means spending less than originally

planned if they can get it past the trade unions!

Kicking the can down the road, or worse?

The domestic tax base, of course, is also in decline.

Indeed. The biggest source of revenue is personal income tax, with 2m

people in the country contributing more than 80% of personal income

tax to it. Naturally, they’re the highest earners, among the most highly

qualified in the country, and unfortunately the ones also leaving SA. On

the corporate side the tax rate is at 28%, considerably higher than our

many international competitors, and much higher than the US’s 21%. A

mere 388 companies in SA pay more than half the tax.

How is government going to finance the immediate

debt of bankrupt state-owned enterprises?

I haven’t a clue and Mboweni is not saying. We must

assume that the money will be borrowed and/or the likes of

civil servant pension funds being raided, as has already been

hinted. True, the government has given Eskom and SAA a

R60bn bailout, but that’s not nearly enough to keep either

or both going.

An immediate key to the situation?

There are no quick fixes but public enterprises minister

Pravin Gordhan needs to depart at the very soonest. A

communist, he was in charge as finance minister when the

fiscal account started to collapse about 12 years ago and

remains the problem. In his present portfolio he has been

responsible for both adverse restructuring and pumping

billions into the system with little to show for it.

Talk of nationalising the Reserve Bank as a part solution?

There is no doubt that it is seen by the politicians as a ‘pot of gold’

with about R800bn in assets. The president and finance minister have

ruled this out, but they could face considerable opposition from others

within the ANC.

Talk of a sovereign wealth fund (SWF) and state bank?

A SWF is something you have when you’re blessed with healthy

financial surpluses. We don’t have those. I wonder if there is not a story

behind the story! We already have a SWF in the shape of the Public

Investment Corporation (PIC), and a new SWF could well serve to

deploy the PIC or Government Pension Fund’s money to fund Eskom.

I see no justifiable reason to have a state bank operating as a retail

bank on commercial principles. The market is already amply served by

the existing banks plus new niche banks.

How do we resolve the inimical unemployment situation?

There are two elements here. First, is that you need to create an

environment that is conducive to vigorous economic growth, and that

requires efficient administration, low taxes and trust.

The second is education, but almost more important is vigorous

skills development. Naturally, tertiary education is important, but

equally necessary is to have a good primary school system which

provides the foundations for the rest. ■

Mixed reactions have emerged regarding finance minister Tito Mboweni’s Budget speech. These have ranged from

‘surprisingly positive’ to ‘missed opportunities’.

Our total fiscal debt is

currently equal to

60%

to

65%

of GDP and there is no sign

of government seriously

reducing state spending.