Tim Wood
American notes
They say that distance lends perspective. That is true, but distance adds something even more valuable: insulation. A well-respected American economic think tank employed both aspects to deliver a withering criticism of South Africa’s fiscal and monetary policies, which they warn will hinder growth and destabilise the region.
Polyconomics, renowned for its precise prediction of how the 1997/ 1998 emerging market crisis would unfold, says: “Fresh blunders in domestic fiscal policy combined with poor monetary policy and the growing global burden of United States monetary mistakes almost surely will depress growth in 2001.”
Local economists seldom feel as unrestrained to say what’s on their minds when it comes to official policy, aware of the potential consequences for their employers of speaking too freely. Hence, we’ve seen very mild criticism of the recent budget. Where criticism exists, it is limited to statements about the government being “rather cautious”.
No such pleasantries from New Jersey: Minister of Finance Trevor Manuel “is proposing a truly awful blend of fiscal changes for 2001”.
Polyconomics says the proposals high marginal tax rates at low dollar values; capital gains; pump-prime spending on social services; low-income rebates and delayed lower taxes for small business are grounded in faulty economic thinking.
“The government’s view is that it must set high tax rates at low income levels because South Africa is a poor country. Of course, this simply means that South Africa always will have few high-income earners, because the tax-rate structure will smother efforts to work while increasing the incentive to join the informal sector.”
Reserve Bank Governor Tito Mboweni is broadsided just as harshly for the country’s interest rate targeting scheme. “The central bank’s overnight rate has been locked at 9,5% for more than a year, and interest rates elsewhere in the financial system are considerably higher. The rand is on a steadily declining path and in the past five years has lost half its value. Deprived of a stable unit of account, economic actors must attach high risk premiums to all financial transactions.”
Polyconomics, which sells economic consulting and forecasting services to clients across the world, also expresses concern about the regional impact of South Africa’s policies.
“We see the potential for serious socio-political instability throughout Africa’s entire southern cone.”
The economists say Southern Africa’s commodity economies have been hard hit by US dollar deflation. With lower commodity incomes to rely on, regional countries are also struggling with declining employment opportunities in their larger neighbour, previously a useful buffer for hard times. Similarly, the countries’ commerce is dominated by relationships with South Africa.
There is one exception: Botswana. Although it is heavily dependent on diamonds, the country has insu- lated itself from external shocks better than any other African country by “focusing its fiscal policy on low marginal rates of taxation”.
Botswana’s top marginal tax rate for individuals is just 25%, a very competitive level against the leading global economies, while corporate tax runs at 20% with the bulk of companies paying just 15%. That is credited with stimulating one of the fastest-growing economies in the world and with modest inflation to boot.
Namibia has gone the opposite way, raising marginal rates to 40% from 35%. For Polyconomics, the only outcome will be lower state revenues and a declining economy.
The team has plenty of reason to place a large bet on that forecast. Founder Jude Wanniski was one of the team that advised former US president Ronald Reagan to cut marginal tax rates and raise thresholds. Somewhat counter-intuitively to the thinking at the time, revenues to the state soared as the extra money left in the hands of taxpayers was put to productive use.
Oh to dream, perchance to pay less tax.