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What about growth?

The latest budget sows the seeds of economic destruction

Bring out the cheerleaders. Government has cut R28 billion off its planned expenditure over the next two years. This apparently demonstrates the ‘fiscal constraint’ of last week’s national budget.

While finance minister Nhlanhla Nene talks about fiscal consolidation, the actual budget proposals reflect a growth in expenditure of 7.9% – faster than GDP growth and inflation and certainly beyond this country’s economic ability to meet that burden.

Instead of cutting expenditure Government straddled the gap between income and expenditure by raising personal income tax by ‘just’ one percent and the tax on fuel by 30c a litre, or 80c a litre if you include the levy for the heavily indebted Road Accident Fund.

And yet it missed its budget deficit target – again. However analysts and economic commentators were mollified by the Ministers commitment to reduce the deficit to 2.5% of gross domestic product in two years’ time.

I’m amazed at the mild reaction. Yes the minister said all the right things. He spoke about limiting state expenditure; he charged his fellow ministers with spending their budgets more efficiently, he warned that government’s wage bill could not increase beyond inflation. He said all of this, as did Pravin Gordhan before him and Trevor Manuel before him. Yet in 2012 Gordhan promised that government debt would peak at 38% of GDP. That figure is now at 41% and will peak at 44%.

My fear is that this is a moving target. And as it moves South Africa will find herself in an unstoppable debt spiral that will ultimately force her into the arms of the IMF. And if that happens the R28 billion shaved off expenditure will look like pocket change.

The economy is not growing fast enough to generate the revenue government needs to cover its costs. Growth and driving growth should have been the single most important factor when designing the budget.

Slow economic growth simply perpetuates and compounds the social problems of poverty and unemployment despite the stated opposite intention.

South Africa’s economic growth forecasts have been reduced every year for the last five years. This year was no exception. Expected GDP growth for 2015 was reduced from 2.5% to 2%. If the electricity crisis worsens or if wage strikes are protracted or global commodity prices fall by 10% more than expected growth will slow beyond this figure.

If this happens the tax base will shrink further, the deficit will widen and loan repayment costs will balloon. Yes government can and almost certainly will increase taxes again. But as Chris Hart and Lesiba Mothata, the chief strategist and chief economist of Investment Solutions argue so eloquently, increasing taxes plugs a short-term hole but the consequence is slower growth, forcing government to increase taxes again, slowing growth further. It becomes a vicious circle.

Economic growth requires investment, not taxation. “What is not well understood is that the resource that funds investment is savings. There are no other avenues to bring new economic capacity into existence than investment, and there are no other avenues to resource investment than savings,” say Hart and Mothata.

“The crux of South Africa’s low-growth problem is a low level of investment, compounded by inadequate savings. The low savings rate lies at the heart of our high unemployment rate,” they argue.

The direct income tax burden is one major factor in retarding the ability of South Africans to save. Yet far greater economic damage is done through taxes that target capital formation and investment viability. These include capital gains tax, property transfer duty, death duties, taxes on dividends and taxes on interest earned. Two years ago, capital gains taxes were raised. This year, it is property transfer duties. The introduction of dividend taxes was another tax increase in previous budgets. In other words, Hart and Mothata say, we continue to eat our seeds [of future investment].

That’s on the revenue side of the budget. The expenditure side is also anti-growth. Government’s determination to be the centre of life for all South Africans simply locks in the inefficiency and reduces the multiplier effect of every Rand that is spent. Think about Medupi. Why is it that Eskom, short so many critical skills, believed it should project manage the construction of Medupi?

Throwing more money at the problem is not the solution. Trevor Manuel realised this a decade ago. For instance, over the MTEF period, Minister Zulu’s new Department of Small Business Development will spend R3.5 billion on mentoring and training support for small businesses. Would government not get a bigger return if it invested the money in a tried and tested entity like small business financier Business Partners.

The National Student Financial Aid Scheme received an additional, and welcome R10 billion. Yet after years of allegations of fraud and mismanagement, it was only this year that the Minister of Higher Education and Training Blade Nzimande ordered an investigation into the allegations. What took so long? Where is the sense of urgency?

In October, during the mini-budget government committed itself to selling non-core assets to reduce the debt burden incurred by the likes of Eskom and SAA. Ostensibly this remains the plan, but the Minister was coy on exactly which assets are to be sold. My bet is that government has back-tracked on this strategy. This maintains the burden of government and locks in inefficiency.

Generating economic growth should be government’s number one priority and should have been the overwhelming theme of the past budget. We have allowed ourselves to wallow in the notion that we are simply victims of economic circumstance. We are not.

Government needs to set the scene for growth. It needs to lead from the front, cut expenditure dramatically and encourage capital formation. South Africa is heading for a solvency crisis that will remove the few choices it currently has. It will also hit the very people government is trying to protect – the poor – the hardest.


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