Enoch Godongwana told Parliament that South Africa had emerged from the fiscal wilderness. Dawie Roodt agreed the corner had been turned, just not for the reasons the minister would want. Debt had stabilised and the primary surplus was growing, but the improvement came from a commodity windfall, an aggressive SARS and a tax burden Roodt said was the highest it had ever been, rather than from growth. Speaking to Alec Hogg hours after the mini budget, the Efficient Group's chief economist took aim at the money flowing to badly run municipalities two weeks before the local vote, the politics behind the fuel levy cut and the social grant court case still hanging over Treasury. He finished with blunt advice for taxpayers, investors and ratepayers..Listen here.Edited transcript of the interview.Alec Hogg (00:01) Finance Minister Enoch Godongwana this afternoon in Parliament, in the MTBPS, said that we have emerged from the fiscal wilderness. And to be fair, there is some evidence: debt is stabilised, the primary surplus is growing. We've now had it three times round. I'm never too happy about a primary surplus because it excludes interest payments, but anyway, that's a measure that the Treasury likes to talk aboutAnd the ratings agencies are smiling. After the mini budget, as we call it, today the rand did appreciate quickly and then came back to where it was before. But let's have a look at the windfall. There was R54 billion more than expected into the coffers, but only R17 billion of that was from taxes. So what gives? Also, there's the Social Relief of Distress grant. That could be a little bit of an unexploded bomb. If Treasury, or government, loses the court case, they're going to expand the number of people who benefit from that grant from 10 million to 13 million [check] and double the cost to us as taxpayers to R74 billion a year. So have we turned the corner, or is it just a Potemkin corner?Dawie Roodt is the chief economist of the Efficient Group. Dawie, good to see you. Let's just talk about that opening statement of Enoch Godongwana's, that we've emerged from the fiscal wilderness. Do you agree?Dawie Roodt (01:39) Alec, yeah, always nice talking to you. Just something, Alec: I've listened to everything, I've run through all the speeches and everything I could lay my hands on, but I haven't analysed the numbers properly. I really have to dig into the numbers to see what the impact is on the South African economy. I've got a broad idea. But yes, to answer your question, I think we've turned the corner if you look at the fiscal accounts. For the wrong reasons, just by the way, and I'll get to that just now.But we have turned the corner. What has happened: we have a fiscal primary surplus, and I actually like a primary surplus. It is still a deficit, let's be fair about this. But the primary surplus tells you that the Minister of Finance is keeping control over discretionary expenditure. So that is the benefit of using a primary surplus, which is a good thing. So it seems to me as if the debt-to-GDP ratio has stabilised, and it's likely to start coming down over the next couple of years or so, which is also a good thing. The same goes for the fiscal deficit: the primary surplus is likely to keep on going up or, put differently, the fiscal deficit is likely to get a little bit smaller relative to the size of the economy, which is also a good thing.But why is that? Why is it that the fiscal account seems to be stabilising? And of course, don't take it away from the Minister of Finance. He's really putting a lot of effort into trying to keep a lid on state expenditure. But the main reason why the fiscal deficit is coming down is a bit of a windfall in revenue, or tax receipts, for the Minister of Finance, where there's an overrun in tax receipts, especially on company taxes. And also, very importantly, there's an overrun in tax receipts because SARS is being very, very aggressive. So you're reducing the fiscal deficit not by spending less. You're reducing the fiscal deficit by taking more out of the economy. And in the process you are increasing the revenue or, put differently, the tax burden on the economy.And the tax burden today is the highest it's ever been on the South African economy. And keep in mind that the economy is just about not growing. The Minister of Finance reduced his estimate to 1.2% economic growth, and I think that is far too optimistic. It's probably going to be less than that, which then implies that the tax-to-GDP ratio is likely to keep on going up a little bit. But let's give credit where it's due, especially on one specific aggregate that we've all been very concerned about.Dawie Roodt (04:06) That has been the debt-to-GDP ratio, which seems to have stabilised. And I agree, it has stabilised, looking at the numbers so far, and it's likely to start coming down a little bit over the next couple of years. Of course, things can still go wrong, but give credit where it's due. That was a major issue. And that, by the way, is the reason why the ratings agencies are looking quite favourably at the South African fiscal accounts, and there's certainly a possibility of a further improvement in the rating of South Africa's debt.We will still be junk, probably only one... At the moment we're two notches into junk with all three of the major ones. And we probably will get a bit of an improvement on that, but we'll still be junk. So yes, an improvement, but it's for the wrong reason, and the wrong reason is an increase in taxes, basically. And economic growth of 1.2% is perhaps on the optimistic side, but that is nothing but a vote of no confidence in your own policies if you only grow at 1.2%. The minister mentioned global economic growth, which is also weaker, but it's well in excess of 3%. So we think of 3% as this absolutely magic number, but that is where the world is growing. And we are only able to achieve something like 1.1%. I think it's in fact going to be less than 1% for the year.Alec Hogg (05:21) So don't pat ourselves on the back. The thing that our tribe would have heard was "no new taxes". But the point you've made is that the tax take, the amount of taxes that gets extracted from the economy, has gone up again: 26.4%, now it's 26.8%. How much further does it go until, you know, with the Laffer curve, you can't push taxes up too much because you get less afterwards? How much further can that tax-to-GDP number go?Dawie Roodt (05:56) Well, I guess you can increase it a little bit more. Remember, tax rates are not going up, but the tax take is going up because of a stronger, well, a stronger SARS, but also a bit of a windfall. There was a bit of a windfall because of commodity prices. But we've passed that point where we can take more out of the economy. And it's not necessarily because of the tax burden as such, or even tax rates as such. That is not the main reason.It's a combination of other things. It's a combination of who pays what and who gets what, and the efficiency of the state. So it's not only the tax burden that is the main issue. Many countries have got a tax burden, some of them in excess of 50% of GDP, and they can actually carry that kind of tax burden. In South Africa, the composition of taxes is wrong. And for the people paying the taxes, it's a very unfair system. It's a very expensive system, and a very inefficient system as well. So we need to look at our tax system. So I guess we are past that point where we can really significantly increase various taxes in the economy. But the major concern is economic growth at around about 1%, and I don't even think we're going to see 1%.Alec Hogg (07:06) Sure. And at some point in the speech, Enoch said 3%. Maybe he was just talking to the crowd?Dawie Roodt (07:12) Yeah, no, he said 3%. But here's the interesting thing. Go and look at these estimates for the next year and the year thereafter. It's always going up. And that's not only the Minister of Finance, all economists do that. They say this is this year, and next year is going to be better, and the year thereafter is always going to be better. It's always better somewhere in the future, and when you get to the future, it's not the same. But that's exactly it: he says 1.6% for next year, which is just horrible, and then I think 2% for the year thereafter, which is also far too low economic growth.Can I just touch on something else that I think is really important here? And that is what's happening to the local authorities. Now, the local authorities are by far the single most important authority out there. And the local authorities are supposed to wash their own faces. The local authorities are supposed to raise their own revenue and pay their own expenditure with their own revenue. That is what the local authorities are supposed to be doing. Now, that's not happening in South Africa. The local authorities have collapsed. We know about this. The local authorities have got horrible audit reports. We know Johannesburg, for example, is exploding, or imploding, depending how you look at it. And the Minister of Finance knows this. He knows that is how you support economic growth, by getting the local authorities to do what they're supposed to be doing. And he's giving them more and more money.And that's something I'm very concerned about. The minister admits that the local authorities are badly run, they cannot raise their own revenue, and they're becoming more and more dependent on the national government, or the Minister of Finance, to fund them. Now, for various reasons, that's something we should be concerned about. It points to very, very weak local authorities, which we do know about, but it also begs the question. We've got local authority elections coming up, and elections are about taxes and expenditure and stuff like that. But now a big chunk of the funding of local authorities comes from national government. That's my bit of a problem: the local authorities are becoming far more dependent on the state.Alec Hogg (09:27) That's a question. I'm privileged enough to live in a well-run municipality. But now I see that badly run municipalities are getting, well, you can't call it a bailout really, but it's quite a lot of money. They're getting nearly R22 billion extra from the equitable share, or in other words what gets distributed from the centre, and then another R13.5 billion on top of that from the fuel levy, which I'd much rather have, you know, pay less for my petrol, thank you. But I suppose that's all politics. Or is it something more sensible?Dawie Roodt (10:01) Of course. No, it's politics, mostly. The badly run municipalities are supposed to be punished. They're supposed to be punished by the electorate. But now you can't see how badly they're performing, because they get a kind of bailout from the national accounts all the time. So they should not be getting this money. Earlier this year, the Minister of Finance stopped paying the transfers to the local authorities because they were in arrears and all sorts of bad things were happening there. And shortly afterwards he started paying them again. I mean, the Minister of Finance blinked first, you know, and [he] didn't even have much of a choice on that. But he blinked first. That is a major concern for me. And of course, there are some local authorities without a tax base. Yes, certainly some local authorities can be assisted. But generally speaking, the local authorities must be able to stand on their own feet, because they're the most important authority out there, but they're becoming more and more dependent on the ministry itself.Alec Hogg (11:04) I guess we have got the election on the 4th of November. Is our voting public getting more mature, and realising that this handout-driven approach for poorly run municipalities cannot continue indefinitely, and that they'd better vote people in who are going to run things sensibly? Or is that just a dream?Dawie Roodt (11:28) No, well, it's not only local authorities. You know, other things like state-owned enterprises, and the Minister of Finance's own accounts. I mean, see what happened there. It's just across the board, just about everywhere. We've seen a dramatic deterioration in the finances of just about everything that belongs to, that's part of, the state. In South Africa, I think people see that. But as far as I'm concerned, it's the local authorities that really matter. That's the place where you need to be able to do business. And it's going to be hidden a little bit, because they're getting bailed out by the Minister of Finance.But let's not get too negative. Something else that I'm actually quite happy about, but it's also a good-news-and-bad-news story, is the emphasis on infrastructure investment, the management thereof, the importance thereof and so on. The minister spent a huge amount of time on that, which is a good thing. But the minister also admitted that many projects are over budget and behind time, and not as efficient as one would have expected. And he's putting all sorts of agencies in place to try to monitor the investment projects, to make sure that we get bang for our buck in South Africa. So that, I think, is another good thing. Investment, capital formation in South Africa, has been far too low, and that's a very important reason why the economy is just not growing. And I think the Minister of Finance knows that as well. So that certainly is a positive.Alec Hogg (13:01) I suppose for many of us, when you drive in certain parts of the country, there are almost prestige projects. The roads in KwaZulu-Natal, I don't know if you've been down there lately, but that Pietermaritzburg to Durban road is quite sensational. It's very, very world class. Also to the north of Durban, the Umhlanga Rocks area. I guess if you've got enough of those, you can point to them.Dawie Roodt (13:32) Yeah, but go to the Eastern Cape and you get a completely different story. I haven't done a proper analysis on this, but I have a suspicion... in fact, that is the fact... I think the Eastern Cape municipalities probably spend more on salaries, relatively speaking, than in the case of the area you're referring to, Pietermaritzburg, Durban, that area. They spend a lot more on infrastructure, I guess. And the same goes for Gauteng, where relatively speaking they spend more on infrastructure than on salaries. But those are wealthier, a little bit better-off municipalities than the rural municipalities, like the Eastern Cape and Limpopo, or the Northern Cape and places like that. And again, we have to be realistic about these sorts of things. We've got poorer areas in South Africa, and part of the function of the state, whether you like it or not, and that's what happens in reality, is to uplift those poorer areas. And that means you're probably going to spend a lot more on the salaries of civil servants and not that much money on roads, while in the richer areas you can actually afford to spend a little bit more on infrastructure.Alec Hogg (14:47) Talk to us about the fuel levy story. From the outside, it looks like another little bit of politicking, another little bit of a lucky packet. On the 4th of November, R10 billion is going to be put into effectively subsidising the fuel price.Dawie Roodt (15:06) Yeah. I must go into this a little bit, but what happened is there was a previous transfer of R10 billion to the energy fund from the Minister of Finance, and he's taking this money back now. So that's why it's not increasing state expenditure. That R10 billion is neutral to state expenditure. Well, of course there's an increase in state expenditure, but he's taking it back from the energy fund, the Central Energy Fund, and he's going to use that to reduce the taxes on fuel a little bit, three rand or so a litre [R3 a litre on diesel, R1.50 on petrol]. Well, there was so much pressure on the minister. I mean, the President talked about this, the various political parties talked about this, and Cosatu too had a lot to say about it, all of them. So I guess the pressure was such that the minister said, okay, well, I haven't got much of a choice, let's at least give them three rand back or so.You know, all taxes are always bad, and I think you and I have spoken about this previously, but the fuel levy is one of the least bad taxes, for various reasons. It's a cheap tax to collect, it's difficult to evade, it's a broad base, it's indirect, and that sort of thing. So if you really want to reduce a tax that's really harmful to the economy, more harmful than the fuel levy, then, for example, company taxes should have been reduced. But yes, it's a popular thing for the Minister of Finance to do, and he reduced it by, what's it, three rand odd per litre. Of course, that is not sustainable, because eventually you will have to recoup that. But fortunately for him, there was a bit of an overrun on total revenue, so for now it's not going to break the bank. So I think for political reasons, and I guess there are some other good social reasons as well, it's trying to keep a lid on how much the fuel price has increased. In the meantime, the fuel price is likely to increase again, looking at oil prices today. Perhaps the rand will save us a little bit. But the oil price is in excess of $110. That means another increase in the fuel price can be expected anyway.Alec Hogg (17:06) Yeah. So come November, Treasury's going to be putting R10 billion into the pot, but the higher oil price, oh, the world unfortunately affects us. Just getting back to SARS, they issued a statement just after the budget calling the second half of the year a challenge to actually achieve their objectives. They need to grow revenue 6%. The economy is only growing 1.2%. That sounds like a bit of a... well, right that they call it a challenge.Dawie Roodt (17:38) No. Yeah, but remember they're talking nominal numbers, while economic growth is in real numbers. So you have to roughly add inflation to that. Inflation, let's call it four and a half or whatever, and real growth, let's call it 1%. Then we're talking about nominal economic growth of five, five and a half percent or so, and they need to grow revenue by 6%. So it's still not going to be easy for them.But I think the message here is very clear, and that is SARS is telling us that they're going to squeeze us even more. And that's the issue. I've got a major issue with that. People are complaining about how aggressive SARS is. And coming back to where we started this discussion, the reason why the deficit and the debt and all those things are moving in the right direction is because the tax burden is going up. So what we need to do, if the minister wants more money, is put measures in place to grow the economy. And then the minister will benefit from a growing economy as well. That's the issue. It has to do with economic growth. That is the problem. And economic growth, as we all know, at 1.2%, even if we get that, is absolutely horrible. I mean, Minister, if only you would have lied a little bit. Say, listen, we're going to go for 3% this year or something like that. Admitting 1.2% is horrible.Alec Hogg (19:00) Well, the interesting point about SARS, as you mentioned it: SARS itself, in that statement, credits lower-than-estimated VAT refund payments as being a big part of why it beat the estimates. So in other words... and I don't know, Dawie, if in your company you've tried to get a VAT refund. We just got one and we had to jump through hoops, because we always pay VAT in. They love us, I suppose, because of it. But my goodness, to get even R10,000 back has been a mission of note.Dawie Roodt (19:34) Yeah, and people are complaining about that. It's not only this. I mean, SARS is really getting... there's no way they're going to repay money. You really have to put up a fight. And this is the unfair part about this, because if you really get into a fight with SARS, they use taxpayers' money to fight taxpayers. And that's unfair. Come on. And, well, actually I'm busy with something. You know, apparently some SARS employees are getting good bonuses and so on, but I'm going to look into that, and I'll tell you when I get to the bottom of it.Alec Hogg (20:05) Getting bonuses for getting more from us.Dawie Roodt (20:07) Yeah, getting more, but I'll get to that. Let me not make any accusations. Let me get my facts straight before I tell you what's going on there.Alec Hogg (20:16) Debt-service costs seem to keep going up all the time. Now it's 21 cents of every rand that SARS brings in that goes just to pay for debt. It's become a real problem, or so it seems from the outside. How are you reading it?Dawie Roodt (20:33) Yeah, but there are two things here. The one is that, of course, interest rates went up recently, long-term interest rates all over the place. But I would say on a slightly longer-term trajectory, we can start talking about interest rates coming down a little bit in a year's time or so. So I think the longer-term trend for interest rates in South Africa is probably a little bit lower. So that's one positive. And the other one is, if we can stabilise the debt-to-GDP ratio and gradually get it even lower, then eventually the interest component will become less of a major issue. Interest at the moment is the third most important expenditure item for the minister, depending on how you classify it. It's major. Like [you've] just mentioned, more than 20 cents out of every rand goes to the payment of interest. That's a huge amount of money. We need to reduce that, by stabilising the debt, and of course lower long-term rates over time will gradually reduce that huge component of expenditure.Alec Hogg (21:32) Dawie, how does it compare with other countries, that 21 cents in the rand?Dawie Roodt (21:38) Yeah, but remember other countries, like for example the French, who've been in the news recently: their debt-to-GDP ratio is 120%, but their interest is lower than what we pay in South Africa, and their total tax take is significantly higher than South Africa's. If I'm not mistaken, the French revenue or tax burden is in excess of 50% of GDP. I'm not 100% sure, but it's much, much higher than ours. So the whole thing is completely different. Inequality is also much, much lower than in the case of South Africa. And they've got different systems. For example, they fund the pensions of civil servants, like the Americans, out of current revenue. In the case of South Africa, civil servants save for their own pensions for the day when they retire. So there are major differences between the various countries. But if you look at South Africa and compare us to our peers, our taxes are much, much higher than our peers'. I'm talking about countries like India, Brazil, South American countries, other African countries and so on. So our taxes are much higher. Our direct taxes, our income taxes, are much, much higher, while our indirect taxes, like VAT and the fuel levy, are a little bit lower. Other countries take more out of indirect taxes. But overall, our tax burden is higher than similar emerging countries in the world.And one must also say that South Africa's financial system is more sophisticated than other countries', and that's also a factor that contributes to the current mix of taxes that we have in South Africa. But our tax system needs to be overhauled. Our tax system is horrible, Alec. It's too expensive. As I mentioned earlier, it's too unfair. It's too complicated. There are many things wrong with the tax regime in South Africa, and we need to simplify it. And we need to change a lot of things in taxes.Alec Hogg (23:36) Just to close off with... well, before we close off, actually, I wanted to ask you about the SRD grant, this big court case. It's a risk. It's a bomb waiting to explode. If it goes off, another R36 billion a year is needed to be found somewhere. Where does that money come from?Dawie Roodt (24:01) We can't increase taxes, really. I mean, we can go through the various taxes. Income taxes, you can't increase that. You can't increase company taxes. You can't increase VAT, that is politically just a no-go. So I guess then the debt needs to go up again. I don't know how we're going to fund that. Actually, I know how we're going to fund that. We can fund that through stronger economic growth. That's how we need to fund it. In the end, economic growth will answer all these very difficult questions, but the ANC is not going to change macroeconomic policies.Here's an interesting thing, talking about macroeconomic policies. The Minister of Finance was actually quite proud, and I think rightfully so, to say that the inflation targets were reduced, and inflation expectations and inflation and all of that. And I think eventually inflation will start coming down again. There's a bit of a short-term shock that we're currently experiencing. But it was the same Minister of Finance who was very much against reducing the inflation targets last year. I can remember that. There was a bit of a tiff between the Reserve Bank and the Minister of Finance, and now he is the guy bragging about reducing inflation. But I guess that's politics. But we can't spend more, not significantly. Of course, it's a good thing.Alec Hogg (25:11) That's a good thing. He's come across. It's a bit like, as I mentioned in a conversation yesterday, Gwede Mantashe used to just drop in at the Joburg [Mining] Indaba, where they talk pretty serious stuff about mining policy. This year he was there for two days, the full two days. He listened, rather than dropping in and telling them what they should be doing and so on. So maybe that penny is finally dropping. And maybe we see that in Eskom and Transnet, which do seem to be going in the right direction.Dawie Roodt (25:46) Yes. Transnet is certainly going in the right direction. I think Michelle Phillips is doing a really good job, after it had been destroyed. And all this private sector participation in the harbours and the railways, that's certainly a good thing. The same goes for Eskom; there seem to be signs of things improving there. But clearly, in the past... I mean, we gave something like R60 or R80 billion to South African Airways, and we gave hundreds of billions of rands to Eskom. Now that's not happening anymore. At least that is some good news: with the state-owned enterprises, the minister is allowing them to sink. Look at the Post Office. The Post Office is coming to an end. It's a good thing. Let it sink. If you can't run it properly, then liquidate the thing. And that's what's happening to the Post Office. So at least, I guess, that lesson has been learned. Stop assisting the state-owned enterprises. Let them stand on their own feet.Alec Hogg (26:44) Dawie, before I let you go, and it sounds like there's some activity where you are at the moment, a little bit of work going on in the background...Dawie Roodt (26:50) There is some. My apologies. My apologies.Alec Hogg (26:50, cont.) No problem at all. It's not that distracting, truly it isn't. After today, three categories, and what they need to do. Starting off with the taxpayer: what was in the budget for the taxpayer, and what should taxpayers do as a consequence?Dawie Roodt (27:12) This is not the platform to make announcements regarding taxes. That is for the actual budget in February. This is a report-back opportunity for the Minister of Finance. But looking at the big numbers, and looking at the statement you just told me about from SARS, the taxpayer must understand very, very well that SARS is coming after you. So make sure that you do what the law requires you to do, but do whatever you can to pay as little tax as possible, legally. I actually think, Alec, with a bit of luck, there could be a bit of relief for the taxpayer in next year's budget, because we need to reduce personal income taxes, especially for high-income earners. I mean, they haven't gotten anything for many, many years. So with a bit of luck we could see something there. Although if I had the opportunity, I would certainly start looking at corporate taxes. Corporate taxes are just too high. But nothing much for the taxpayer, except that you shouldn't let your guard drop: they are coming for you.Alec Hogg (28:21) Investors.Dawie Roodt (28:25) Investors: I think this is good news for bonds. If I was a bond trader, I would look at bonds. I think bonds in South Africa give you a very nice return. We know the market is very liquid, very well regulated, and with low inflation targets, and hopefully with low inflation going forward, bonds are the place to be. So if I'm a foreigner, I would certainly look at South Africa's bond market. That's something I would consider.Alec Hogg (28:53) Equities: good, bad, anything?Dawie Roodt (28:56) Equities? No. You know, with this kind of economic growth, the equities that you can buy are the big guys, because they are international companies. The local guys? Perhaps you can look at construction companies, with this new emphasis on construction, and maybe the local authorities will start pulling up their socks. But generally speaking, with economic growth of 1%, it can't be. And anyway, you can see that on the JSE, how many companies have delisted from the JSE. So no, I'm not a big fan of equities in South Africa at the moment.Alec Hogg (29:25) And nothing in the budget that's going to change that idea. And what about ratepayers in municipalities?Dawie Roodt (29:34) Well, hopefully... well, not necessarily for the ratepayers, but perhaps for people living in municipalities, which is all of us. Hopefully, with this new emphasis on municipalities, we will get better service delivery. But that in the end is also a political question. So let's hope we all go to the polls on the 4th of November and make sure that we get good political leaders. I think that is, in the end, what's really going to change things at the local authority level.Alec Hogg (30:01) It's an interesting point. The 4th of November is just round the corner, two weeks to go. There is a lot of evidence in this budget, as there has been in many others, of how much it costs the centre when a municipality is mismanaged. So really it's our responsibility to make sure that we put the right people into those positions.Dawie Roodt (30:25) Yeah, and that's happening. I mean, that is happening. I've been a critic of the ANC for some time now, and I think rightfully so, because they've caused so much damage, so, so much damage, to the South African economy. And people know this. The electorate knows this. And we're moving away from the ANC, and we're trying to find our feet, trying to make up our minds on what kind of political mix we want. And that mix will include less of the ANC, and that is a good thing. And in the end, the power is in our hands, so let's use that weapon. It's called the pencil, and we get to use it and make sure that we get the political leaders that I'm sure we all want.Alec Hogg (31:08) And what we actually deserve. Dawie Roodt is the co-founder and chief economist of the Efficient Group, and this has been the BizNews Edge special mini budget edition. I'm Alec Hogg..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. 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