The finance minister’s Budget is going to bring greater misery
analysis
Nigel Bruce
If the economy had been growing at 5% or more, a United States dollar cost R5 or less and a million jobs had been created instead of lost over the past five years, the national Budget presented to Parliament this week by Minister of Finance Trevor Manuel would have had some justification.
Instead he has gone on a spending spree that will be politically popular but is going to be difficult to maintain because it is based on windfall gains garnered as the rand has headed south.
Simply put, Manuel is feeding seed corn to the masses and the outcome of that is going to be greater misery. The next five years will not see growth rates anywhere near what is needed to create a million new jobs. Prices will rise because a sustained devaluation of any currency means that the productive capacity of the economy shrinks and, as windfall gains from exports are eroded by higher production costs as new machinery is imported, it will progressively cost the economy more to produce less.
This Budget has been predicated on the continuation of what is presented as the robust state of Treasury finances. That is an illusion. In reality what they represent is nothing of the sort. Government finances have been given a shot in the arm, the potency of which is going to reduce swiftly in the years ahead.
From today South Africans are even more dependent on foreign investors than they were yesterday and on a fortuitous upturn in the commodity cycle. Simply put, the value of the rand is now even more in the hands of foreign investors than it was yesterday.
What they will examine is where, given the mediocre performance of the economy, all this cash sloshing around the Treasury has come from and whether the flows are capable of being maintained.
The answer is that they have come from the broadening of the tax base to include income from abroad; from unspent balances as the government failed to deliver in previous years; and from the taxation of windfall export profits as the rand’s value has been in protracted decline.
Maybe, too, the gentle decline in both corporate and income-tax rates in previous years has made tax evasion less attractive and maybe the revenue services have become more efficient (or more intimidating) in the collection of taxes.
The question now is how those investors with resources abroad are going to react, given that the promised reduction in exchange control has not taken place and is unlikely to happen now. I doubt whether the reduction in income tax from 42% to 40% is enough to persuade them that they have had a fair deal, especially as the rand remains a fundamentally weak currency that will now be further undermined by rising inflation.
These are the category of taxpayers (about 20% of the total) who pay 80% of income taxes. They are the investors whom the government should be going out of its way to persuade that their resources are better invested in this country. And if they are not convinced, you can bet that foreigners are going to be even more sceptical.
These are the entrepreneurs on whom sustained economic growth is critically dependent. They are the most potent instruments of job creation. Without them there will be no prosperity.
But perhaps the worst message that this Budget sends to investors is that privatisation is becoming increasingly a fiction. The important thing about privatisation is not what it brings into the Treasury, but who it demonstratively transfers under-performing assets to those who will use them more efficiently.
The message is that now a large part of this economy is going to remain inefficiently run, which, in turn, is going to constrain growth.
Of course, some of the social expenditure is long overdue, especially that on pensions, health and crime. Indeed, in the last two categories it may not be enough, given the enormity of these problems. Certainly it is too little too late.
But there are other areas of material expenditure that are quite scandalous. The notorious arms deal is one. Another substantial beneficiary is the local authorities who have so mismanaged their own finances and are so manifestly unable to collect taxes that they are in effect being bailed out. They need this money simply to maintain services. The chances of their improving them are, at best, remote.
When a Budget is inadequate to the task ahead, the Budget address invariable contains expositions of compassion, references to obscure philosophers and hubris in the form of threats to imagined miscreants. It is the application of Sir Edward Boyle’s Law to the politician: the greater the external pressure, the greater the volume of hot air.
If compassion for the destitute was on the minister’s mind, then his Budget has failed miserably to provide it. As Hamlet said: “Words do not pay debts.” For he turned his back on a basic-income grant that is affordable and would get some resources directly into the pockets of the poor without first running the gauntlet of politicians, government officials and social workers.
The minister handed out grapes to parliamentarians this year before he began his address. This could not have been more apt given the nature of this Budget, the fruits of which, if not eaten soon, will quickly go rotten.
What he should have done, of course, is use the ready cash in the Treasury to finance substantial decreases in both corporate and income taxes. This would quickly close the tax gap (the difference between what taxes should bring to the Treasury and what they actually bring) and encourage investment. Both of which would soon mean higher tax revenues, which would allow what Manuel calls his compassion to roam unchallenged.
They would also have boosted economic growth levels envisaged in his own macroeconomic policy, which experience has shown will begin creating sustainable jobs. And that is what the majority of citizens in this country want more than anything else the genuine compassion this Budget is not going to give them.
Nigel Bruce is a Democratic Alliance MP