The SA Budget for 2017-18 – Cross road or dead end?

March 3rd, 2017 by Brian Kantor

The Budget speech and accompanying Review refer to an economic cross roads, suggesting a new path is to be taken to accelerate growth in SA. There is little in the Budget proposals to indicate a way out of our economic dead end of persistently slow growth and ever higher tax rates. Yet both government spending (up 3% in real terms) and government revenues (up slightly more) and their share of a slow growing economy are expected to rise. The negative feedback from higher tax rates and higher tax revenues to fund an ever larger role for the SA government in the economy – on the growth outlook – is simply not recognised.

Higher income and expenditure tax rates may help to balance the books but will not do anything to revive the creative and entrepreneurial spirits of the key economic actors, the high income earners. The dependence of all South Africans on them goes much further than the taxes they pay to fund welfare benefits. They earn their higher incomes (competing with each other) by directing the markets for jobs, for essential goods and services, and for capital. And they help organise the education, training and skills that make workers more productive and capable of earning more. And they take risks with their capital, human as well as financial, to innovate in the search for better methods and better products and services that is the very stuff of economic advances. This Budget and the accompanying rhetoric will not encourage them; it is likely to do the reverse.

The scale of the redistribution of income from the best rewarded in SA to the wider community is large. One can refer in this regard to Figure 1.3 of the Budget Review that most strikingly demonstrates these outcomes. It shows that the top 10% of income earners contribute 72% of all taxes (VAT etc included) while the bottom 50% receive 59% of the benefits of government spending while contributing 4% of taxes. The middle 40% receive 35% of the benefits (valued at their cost not quality) for 25% of the taxes paid. Clearly there is little scope for further redistribution from the top 10%.

There is much scope for faster economic growth. But this will take less redistribution from the high earners and much better returns (in the form of delivering the extra skills that command jobs and higher incomes) from the large sums the government spends on education and training. It will take much better delivery by the state owned companies that perform so poorly for all but their own employees and directors. Privatisation is the obvious solution to wasteful government spending (the solution to egregious government failure) but alas is not on offer.

What is offered by the Budget as the solution is Transformation for better or for worse (depending on whether you stand to lose or benefit) and the promise of Radical Economic Transformation. By Transformation is meant, presumably, a diminished (proportionate) role in the economy for white South Africans who – presumably – still dominate (disproportionately) the ranks of the movers and shakers of the economy despite impressive transformation to date and despite the indispensability of their contributions to the economy.

It is well recognised in the Budget that economic growth is and has been transformational and that transformation without growth impossible. To quote: “Growth without transformation would only reinforce the inequitable patterns of wealth inherited from the past. Transformation without economic growth would be narrow and unsustainable…”

In a similar vein:

“If we achieve faster growth, we will see greater transformation, enterprise development and participation.”

Economic growth is transformational for SA. Faster growth would mean a greater pace of transformation as the economy would call more urgently upon the skills and abilities of all South Africans and thus help to create improved outcomes. Transformation with growth is inevitable, most desirable and most helpful to the economy. But policies for transformation that intend to handicap white South Africans, who play a crucial role in the economy, to favour a few well-placed, advantaged black South African business people will only frustrate economic growth, rather than grow it, and slow down transformation.

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