Has Trevor Manuel presented an election budget, or does it reflect a renewed commitment to social democracy?
Social democracies seek wide legitimacy for their policies. The mini budget is based on the agreements reached at the Growth and Development Summit. This indicates a resurgence of social dialogue institutions like the National Economic Development and Labour Council (Nedlac), as the government seeks a wider social mandate to legitimise its policies. Both the expanded public works programme and the roll-out of anti-retroviral drugs were discussed at Nedlac. However, the social pressure from labour and its allies, like the Treatment Action Campaign, were needed to bring the government to the table. Thus, in terms of strengthening dialogue and increasing social spending, the mini budget does represent a shift towards social democratic principles.
Last week, economist Nicoli Nattrass of the University of Cape Town argued that without a rise in taxation one cannot call the budget social democratic (“Don’t be fooled by Manuel’s budget”).
In one important sense this is a valid point: raising taxes will be necessary for a wider poverty eradication programme. According to the revenue estimates the tax/GDP ratio stays consistent over the next three years at 24,8%, which is extremely low in comparison to both developed and developing countries. Proposals endorsed by the Congress of South African Trade Unions, among others, call for an increase in the tax/GDP ratio, and an increase in social spending to about R30-billion over a three year period. The significance is that even these proposals only call for a modest increase in the tax/GDP ratio, to about 27%.
The stable ratio for taxation over the medium term is not surprising, as it assumes increased economic growth as a consequence of government stimulation of the economy. The idea that the government needs to stimulate the economy and boost demand — called counter cyclical measures — is central to a social democratic approach to boosting revenue and economic growth. In turn, this would mean greater revenues and increased social spending.
It is, however, wrong to suggest that increasing benefits to the poor always requires an increase in taxes. Instead what is needed is a mixture of tax increases and tax decreases on regressive taxes. So, instead of cutting personal income taxes, VAT could be reduced. As poor people spend a higher percentage of their income on VAT in comparison to rich people, they would benefit more from a cut in VAT.
Nattrass’s basic contention is that if the government truly adopted a social democratic path it would then ask citizens to spend more of their money on taxes. This is the correct measure of social democracy in Europe, but in South Africa, with our inequalities and lack of a large taxation base, a different challenge faces us. This challenge is how to redistribute incomes from the rich to the poor in a growing economy.
Nattrass argues that the budgets seek to “give the ANC cover for its largest policy failings, unemployment and HIV/Aids”. Her analysis is that spending over the medium term is insufficient to meet even the government’s own estimates of a roll-out plan, and that all spending on HIV/Aids does not go directly to HIV/Aids. For supporters of a comprehensive treatment and prevention plan, this is obviously worrying. However, this does not prove the short- term nature of the budget. On support for free basic services, extension of child support grant and public works programmes, among others, there is a long-term commitment.
Overall, despite a valid concern about HIV/Aids spending, the budget is expansionary over the next three years.
On the revenue side, the proposals are equally remarkable, raising an additional R37-billion over the next three years. The deficit will be increased to 3,2 % of GDP in the next financial year to accommodate additional spending. Non-interest spending increases in real terms by 4,4% over the medium term. This is a large increase in social spending compared to previous years.
Ebrahim-Khalil Hassen is a senior researcher at the National Labour and Economic Development Institute