SIMON BROWN: I’m chatting with Wikus Furstenberg. He is head of interest rate process at Futuregrowth Asset Management. Wikus, good morning. I appreciate your time. You put out a look-ahead to next week’s budget, which comes on Wednesday. You call it “a sliver of good news“, and a “sliver” is what I suspect it is. In essence, from our Medium-Term Budget Policy Statement in October, it looks like tax revenues are going to be about R100 billion better than expected, which is great. Of course, the number was well depressed, but it does give Finance Minister Tito Mboweni a bit of wiggle room.
WIKUS FURSTENBERG: Good morning, Simon. Yes, indeed. I think we should probably take what comes our way. As you indicated, it’s an improvement in fiscal trend, but of course this is from a low base, it’s from a horrible situation. It’s just less horrible now, but in the end our budget deficit is probably going to be a little bit smaller.
But Simon, there’s a lot of work that needs to be done. We still need to cut expenditure. Expenditure is holding up relative to budget, and the way it’s going, the old issues, in particular, are still hovering in the background.
So for the forthcoming fiscal year we estimate a deficit for 2021/2022 somewhere around 9% to 10% of GDP. That’s huge. That’s supposed to be a lot lower, closer to 3%.
So in the end, with regard to our debt-to-GDP ratio, we are still issuing debt. We have a primary deficit, which implies that we have had to borrow to service our debt load. That’s just not sustainable, Simon.
So yes, we’ll take the good news and it’s great, and I don’t think there’s going to be a need for him to even consider raising taxes. As it is, I think we would argue that South Africa is overtaxed in any case, and that’s been the case for years. So there’s not a lot of room to manoeuvre it, but at least you can avoid that one for now, I think.
SIMON BROWN: He did mention in his October statement that they were looking for tax increases. That does look like it’s out of the window for now – and he expressed that “for now”. You mentioned the wage negotiation. I remember in February last year I was in Cape Town for the budget, and afterwards I chaired a panel and there was a general sense of “not a bad budget” but a lot of promises, and we needed to see execution.
Of course, Covid came and execution didn’t happen, but one aspect was the government wage bill, the negotiations with the union. That remains maybe not the biggest threat, but certainly a significant threat to our budget – not just this year, but in the years ahead.
WIKUS FURSTENBERG: Absolutely, Simon. If you look at the wage bill, at our last estimates round about 55% of tax revenue collection goes to the wage bill. That’s just not sustainable. It’s a very difficult one to address, because it’s obviously also about politics. There’s lots of execution risk here. So lots of promises, good intent. We know what we need to do. We know how to get to that massive execution risk. [In] the big picture, if we zoom out from all those sort of bits and pieces, we have what we call the fiscal strength score. Just to give you the big picture, five is a great score. We were sort of close to four in 2006/2007, when we actually printed small surpluses. Now we are down to a score of around 1.5, and we do not want to be sitting at zero. So there’s still a long way to go.
But, as you said, there’s a sliver of good news, so let’s see whether it can build on that.
SIMON BROWN: We’ve seen personal income tax under pressure. We get that. The pandemic decimated employment, and so forth. Is that something we can expect in the year ahead? Maybe less in this calendar year but certainly, looking forward to 2022, starting to pick up; less perhaps because we’re having a rocking economy, more perhaps simply because the pandemic is moving behind us.
WIKUS FURSTENBERG: I think it’s sort of a tax source that we would prefer. Personal income tax, as you said, keeps losing momentum and I think it’s going to be very difficult for them to consider that right now. But maybe down the road.
SIMON BROWN: That was Wikus Furstenberg, head of interest rate process at Futuregrowth Asset Management.