OPINION: The art of the possible

Sitting in the National Assembly last Wednesday watching Finance Minister Tito Mboweni present his budget, the gravity of the moment was apparent.

That there were no by now much anticipated histrionics by the EFF, came as something of a pleasant surprise, but perhaps this heralds a dawning realisation that populist posturing and vituperative political point scoring, will do little to avert the tsunami that is speeding, none toO quietly, toward South Africa’s economic shores.

Mr Mboweni’s budget, keenly anticipated, was preceded by much speculative prognostication by those who profess to understand what drives our economic fundamentals, the minds of those in the ruling party who have the greatest degree of influence over fiscal policy, and the impossibility of the choices he confronted.

What emerged took most by surprise, which just goes to show how imprecise is the business of forecasting in an environment where the forecaster is dealing less with hard fact, than educated guesses about the variables that influence what is being forecast.

The much anticipated increases in VAT and personal income tax, did not come to pass. On the contrary, people in the lower income brackets will actually get something back in the new tax year, albeit only a small amount, the first time this has happened in almost a decade.

Sin taxes, as they became known under the stewardship of Trevor Manuel, were modest by comparison with the recent past, so much so, that wine industry advocacy body, Vinpro, released a statement thanking government for responding to its appeal to bring some relief to the hard-pressed liquor industry’s excise burden.

Why such an expansionary budget when the fiscus is literally in free fall, with an anticipated shortfall in revenue collection sharply increasing the country’s debt burden in the next three years?

For starters, the last VAT increase from 14% to 15%, resulted in an even greater revenue shortfall than the previous fiscal period. It also hit those who can ill afford it – the poor – much harder than those who have the discretionary income to adjust their expenditure to mitigate the impact of a VAT increase. For the poor, a 1% VAT increase impacts a far greater proportion of monthly expenditure than that of the better heeled. The poor have very little that can be characterised as discretionary spending: food, rent, transport, school fees and supplies, clothing and so forth, make up the overwhelming majority of what the poor spend each month.

The goose that has laid the golden egg for the last quarter century, the personal taxpayer, is on life support and as Mr Mboweni pointed out, it makes no sense to further burden this particular goose, because the inevitable push back will see further declines in revenue collection. Way back in the 1970s, one or other of the taxation commissions of inquiry noted that “a taxation system that encourages people to cheat is self-defeating”.

Perhaps Mr Mboweni was mindful of that quote when he formulated the proposals, which would have been ratified by the cabinet, before he included them in his budget speech.

For those who feel they are paying too much tax, resorting to either avoidance (legal) or evasion (illegal), increasingly becomes an option, which makes the raising of tax rates a self-defeating exercise.

Margaret Thatcher may have been reviled for many of her economic policy positions, but she was spot on with her view on socialism: “The trouble with socialism is that eventually you run out of other people’s money.”

Well nigh 18 million people in South Africa get one or more social grants every month, and those social grants need to be funded somehow.

Since our economy, like so many others around the world, is consumption-driven, the personal taxpayer truly is the goose that lays the golden egg.

That goose cannot be dependent upon the state for an income, as was so abundantly proven by the failed experiments in both Soviet Russia and Communist China, before Communism in Russia collapsed, and the Chinese Communist Party crafted a hybrid socio-politcal-economy that, while retaining iron control of its citizenry, cleverly milks the desire of the rest of the world to over consume.

The inequities inherent in capitalism notwithstanding, it is the only economic model that has consistently produced wealth, and it is wealth that enables the collection of taxes.

The economic nirvana which the Breitling socialists in the EFF tout, is a fallacy. Outright state ownership of the means of production – land, capital, physical assets – with the entire workforce working for, and dependent upon the state, will create an economic wasteland of dependents mired in penury, with the obvious exception of those who, as George Orwell points out in Animal Farm, run the system.

In the same way that the state is incapable of creating jobs (outside of the civil service) in a capitalist economy, it is incapable of creating wealth.

Which leads Mr Mboweni’s unexpected “declaration of war”, which is how Cosatu characterised his announcement that government plans to reduce the public service wage bill by R156 billion over the next three years.

The money to pay the salaries and benefits of the nation’s civil service comes – surprise, surprise – from the taxpayer. Admittedly, the civil service is made up of taxpayers, and a pretty lucrative cohort it has come to be, what with the consistent growth in the public sector pay packet in the last two decades. Mr Mboweni’s budget review notes, in this regard: “Civil servants’ salaries have grown by about 40% in real terms over the past 12 years, without equivalent increases in productivity.”

Salaries in the private sector have, by comparison, languished or shrunken in the same period, with most employees getting below inflation or even zero increases, particularly in the last two or three years.

The unemployment trend continues skyward, as pointed out by Statistician-General Risenga Maluleke in the 2019 quarterly labour force survey, released earlier this month: “With 10.4 million people unemployed in the fourth quarter, I fear the rate could climb again closer to 30% on standard definition – people who are jobless, actively seeking work, and available to take a job – and 40% on the broader one: people who are unemployed and available to work but have not taken steps to look for work.”

The fewer people that there are in employment, the less tax gets paid. A declining revenue base – now a harsh reality – means government has less to spend on creating the environment for the private sector to create jobs, to fund infrastructure development, to fund healthcare, education, defence, housing development, public enterprises (which are inherently economically unsustainable), and, of course, to pay civil servants.

While the socialists will tell you that it is possible to borrow or money-print your way out of the pickle in which South Africa now finds itself economically and fiscally, this is a just another of the disingenuous canards propagated by those who have no understanding of economic reality.

Zimbabwe, Cuba, and Venezuela are just three shining examples of this particular folly.

South Africa’s ability to borrow is directly proportional to how it is viewed by the credit rating agencies – Fitch Group, Standard & Poors, and Moody’s – despite what the Marxist\Leninist ideologues in the ANC’s economic policy think tank might like to believe, and it is only Moody’s that has the country at Baa3, just one notch above “junk” status.

Moody’s response to Mr Mboweni’s budget was characteristically cautious, but a comment he made before his delivery shows where his expectations lie: “Our reading of the situation is that they will react to how they read our fiscal stance.”

Mr Mboweni is clearly betting the farm on Moody’s perceiving that despite the budget deficit rising to 6.8 percent of GDP in 2020/21, it is clear that government is determined to drive it down.

He is signalling his determination to do so by as a start, taking on the most powerful union federation in the country, and trimming by just 1%, the bloated public service pay packet that consumes 46c of every rand spent by government.

He’d better succeed, because if he doesn’t, and Moody’s downgrades South Africa’s sovereign debt rating in its March decision, the ensuing capital flight will put the final nail in the coffin of our hoped-for economic recovery.

But for Mr Mboweni to succeed, the unions need to do the unprecedented: compromise.