Business

The EFF's economic Armageddon

Lisa Steyn

Its answer to the national deficit and social spending appears to be all rands and no sense.

In the red: Julius ­Malema’s EFF promised to double the budget and increase social spending. (Joel Thungren)

The 2014 budget would have looked very different had the Economic Freedom Fighters (EFF) been in the driver's seat.

Julius Malema's party's election manifesto, launched on February 22, makes a number of ambitious commitments, including assurances of increased social spending and doubling the pay of public servants.

The party said raising some taxes and nationalising mines would provide sufficient funding for its grandiose plans.

At the manifesto launch, the EFF described a programme of action for the next five years. But, if its plans were to be implemented, it could prompt an economic Armageddon.

In his budget speech on Wednes­day, Finance Minister Pravin Gord­han appeared to take a swipe at the newly formed party and the document, saying: "The new economic order we seek cannot … be built on populist slogans or unrealistic promises."

The EFF proposes doubling the present budget of more than R1-trillion to R2-trillion by 2017. In order to deliver on all its commitments, the party would certainly need the extra cash.

Wage bill bloated
Critics say the ANC government's wage bill is bloated, but the EFF's aspirations would put it to shame.

In this year's budget, the public sector wage bill grew to 39.5% — about R500-billion — of projected expenditure.

It increased by R21.9-billion to compensate employees as a result of "higher inflation projections and salary adjustments for clerks".

Ratings agencies have consistently expressed concern over the growing wage bill and signalled that it is something to be watched.

But, the EFF manifesto said, "the EFF government will bring back the dignity of public servants by ensuring that there is an increase in the salaries of all public servants by a minimum of 50% in the period 2014 to 2019". This would see the wage bill balloon to R600-billion.

According to the 2014 budget review, the large expansion of social grants over the past decade has seen these grants reach 57% of consolidated expenditure. This year this spending will rise — but not nearly as much as it would under the EFF's control.

Doubling every social grant
According to its manifesto,the party would double every social grant. It would even introduce some new ones, such as R2 500 a month for all terminally ill South Africans.

This means that social expenditure would climb from R131-billion to at least R262-billion under EFF rule.

Although it all sounds pretty good, the question is: How would it be financed? But the EFF has a plan — nationalisation and bumping up taxes.

Corporate and company income tax would be the big one and "should amount to not less than 40% of the tax revenue, while all other taxes, including VAT, are retained at the same levels they are in currently," the party said in its manifesto.

In response to questions, the EFF's commissar responsible for policy and research, Floyd Shivambu, said the business tax should contribute 50% of overall tax revenue "because we would have expanded industry and will raise taxes on natural resources extraction".

Gordhan in his speech said that revenue of R1-trillion had been achieved while "reducing the tax rate for companies from 40% in 1994 to 28% … [although] during this period the contribution of corporate income tax as a proportion to total revenue has nearly doubled".

Company income tax in the 2014-2015 year will account for 20% of revenue collection.

EFF government
An EFF government would increase taxes on speculative capital inflows by 60%, tighten exchange controls to lock in capital to invest in South Africa, and pass laws that would require corporations doing business in South Africa to be listed in and pay the majority of their taxes in South Africa.

It is not clear whether the plan is to increase the tax by 60% or to 60%, but such taxes are typically in the single digits, such as in Brazil, where a 2% tax on foreign investments was introduced in October 2009. It was abolished two years later to encourage foreign investment back into the market.

This tax, Shivambu said, would be the second-largest contributor to the fiscus.

"Anglo American Corporation, SAB, Goldfields and all corporations that have left South Africa should come back because the majority of their operations and business are in South Africa."

The nationalisation of entities such as the mines, banks and other strategic sectors of the economy without compensation, the EFF believes, will contribute significantly to the fiscus.

Shivambu said the nationalisation of mines and banks would contribute massive resources to the fiscus and would double or even triple the budget available for government expenditure.

Sovereign wealth fund
With the large amounts of money generated, an EFF government would create a sovereign wealth fund, which would primarily be responsible for investment in Africa.

The idea of nationalising mines was rejected by the ANC in 2012 following research, which found it would be against the Constitution to seize them and too expensive to pay compensation.

The research found that the cost for the state to acquire 100% of listed mining companies would be just under R1-trillion. Nationalisation would trigger bilateral treaties with South Africa's trading partners.

Shivambu said an EFF government would amend the Minerals and Petroleum Resources Development Act to include a condition that every mining corporation that sought to continue doing business in South Africa would cede 60% of the business to the state. These companies would still pay tax.

"State-owned corporations are tax-paying corporations anywhere in the world, and such will not change in South Africa. The state will now be doubly benefiting from state-owned mines and banks' profits and taxes that they will be required to pay," he said.

The EFF would also nationalise the Reserve Bank and bring it under the state's control.

Increasing customs
Shivambu said an EFF government would exercise the necessary fiscal discipline and would avoid having to borrow money from international money markets because the sovereign wealth fund and the money generated from state ownership and control of key sectors of the economy would insulate the country from creating unnecessary debts.

The EFF would increase "customs and excise duties and levies" by 50%, with the expectation that "this will lead to additional billions of rands for additional usage and income," the manifesto said.

Customs are duties levied on imported goods and, in Sars's 2013 tax statistics, amounted to R39-billion.

Excise duties are taxes levied on high-volume goods and commodities consumed daily that are produced or sold within a country, such as alcohol and tobacco.

In this week's budget, these taxes will contribute 8.2% to revenue in the 2014-2015 year. In a R1.25-trillion budget, this would account for about R102-billion coming into the fiscus.

An EFF government, the party said, would abolish the Employment Tax Incentives Act, for which the treasury has put aside R1-billion in 2014, and redirect all monies meant for this to social welfare programmes.

Shivambu said the EFF central command team is responsible for its economic policies.

"We are not sponsored by any economist outside the organisation because we know where we want to be and how we will get to where we want to be," he said.


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