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State collects 44% of GDP in revenue

Plays a much bigger role in economy it lets on.

The state plays a very big role in South Africa. Bigger than most people actually think and certainly a bigger role than government actually lets on.

Forget for a moment the impact of rules and regulations on the economy. Just look at the actual revenue the state collects – it’s actually quite large.

I have added all the revenue – taxes and non-tax revenue – that the state collects. This includes normal taxes, payments to municipalities and state-owned enterprises (SOEs). I also tried to exclude double counting to paint an accurate picture. The result is astonishing.

The state collects 44% of GDP in revenue. It must also be one of the largest such numbers for any emerging country in the world.

The number illustrates government’s role in the economy. Although a big portion is represented by payments to state-owned enterprises such as Eskom for electricity, it can be seen as a way to redistribute wealth and can be seen as additional taxes.

One area where state revenue certainly increased in the last few years is at municipal level. The calculations show that the revenue municipalities collect as percentage of the GDP has risen by at least one percentage point during the past five years.

This really puts the squeeze on consumers as the increase in profit margins on water, eletricity and a host of other services of these muncipalities is for all intents and purposes another form of tax.

The same applies for education, health and safety where citizens rather pay private institutions for services to replace the poor services delivered by the state. In many other countries the state will use tax collections to offer these services at an acceptable level. You can even add toll roads and airport/harbour taxes to the mix.

So while National Treasury shows consolidated tax levels of around 27% to GDP, overall state revenue is closer to 44% but with private social security such as pensions it is closer to 55%.

This clearly shows that the state cannot increase its collections without doing real damage to the economy.

Furthermore, the state employs about 22% of the formal workforce and pays an estimated 29% of all formal sector salaries.

Since 2006 to September last year the private sector added just 1 000 (yes, just one thousand jobs in formal private sector in six years). During the same period, the state added nearly 400 000. The state’s salary bill make’s up over 14.5% of GDP!

I expect that future taxes will increase faster than GDP growth and that new taxes such as carbon taxes will not reduce the governments role in the economy.

I am not sure what a socialist state is, but these statistics show that the South African economy is a mixed economy with a very strong state envolvement.

The big problem is that the state and the majority of the 504 state-owned enterprises are not efficient. Many of these agencies only exist to collect revenue and are not enablers of economic growth. It is therefore chrystal clear that the privatisation of state assets must be on the table.

The Minister of Finance alluded to this during his budget speech and if SOEs need more guarantees from government to perform their functions, the only option will be to sell off assets.

It is therefore clear that the government has more responsibility than it likes to admit. This worries me more than the actual size of its economic envolvement.

It should not have this huge role, especially not if ministers point fingers at the private sector for not taking responsibility. Government should rather focus on providing efficient services, as the 44% GDP exposure is one of the highest in the emerging world.

Table 1: The size of the state via overall revenue as percentage of GDP in March 2012

For 2011/12 tax year % of GDP
National government  tax only revenue 24.20%
National non-tax revenue 1 0.60%
Provinces & social security % agencies 2 3.10%
Municipalities 3 5.40%
State-owned enterprises revenue 3 9.20%
Other state revenue i.e. school fees; university 4 1.40%
Overall government revenue as % of GDP 44.00%

Sources: First four national treasury tax statistics and S71 local government spending. Annual reports for SOEs economists estimate for education spending via CPI weights.
1. Includes interest, dividends, rent on land, sales of goods and services, fines and penalties, sales of capital assets,

2. Includes provinces (vehicle licenses and gambling taxes), social security (UIF; workman’s comp etc.)and selected public entities (SANRAL, RAF, etc).
3. Includes all local government revenue but water and electricity for local government subtracted from Eskom water boards so no double counting. There may however still be small amounts of double counting i.e. government officials flying SAA but should be small. National and provincial grants removed from local government revenue. Excludes monies owned to municipalities which could add another 1,5% or more to revenue as % of GDP.
4. In South Africa many parents have to pay “extra” to have “normal” high standard schooling plus universities charge. Estimate taken from Consumer price inflation weights.

Mike Schüssler is chief economist of economnists.co.za

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