FRANS CRONJE: Everyone is praising Gordhan's budget. My read is very different - Business Day, 28 February 2017

'Many politicians and analysts don’t like to hear it but the government has maxed out the economy’s revenue-creating capacity'

 

By Frans Cronje 

 Addressing a conference on small business in 1986 Ronald Reagan said, “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it”. That sentiment ran through much of last week’s budget speech and explains why we have not gone along with the many analyses appearing in the media that the Minister of Finance did well to deliver a considered budget in the best interests of the economy and the people of South Africa. Our read is very different.

Government expenditure now accounts for more than 30% of GDP. Our data extends back to the 1960s, and, until 2013/14, expenditure had never breached the 30% level. Even as the economy was collapsing around the ears of the National Party government in the 1980s, expenditure levels only twice exceeded 26% of GDP.

Revenue is projected to breach the 30% mark in 2019/20 for the first time on record. In the mid-2000s, when the economy grew most strongly, the figure averaged around 23%. Yet even with corporate taxes now accounting for less than half the revenue collected from individuals, the minister announced that State-owned companies are projected to receive over R400 billion in the period to 2019/20 or 45% of all public sector infrastructure expenditure. Provinces and local government will receive around 40% between them. Some of this will, of course, filter into the private sector, but only via the now ubiquitous patronage and corruption networks. Only 1.7% of public infrastructure expenditure has been explicitly budgeted for public-private partnerships.

The minister forecasts the budget deficit whittling its way down to -2.6% of GDP by 2019/20. But that is contingent on the economy achieving the Treasury’s growth forecasts and the receiver of revenue achieving his collection forecasts. In recent years, Treasury growth estimates have tended to be far too optimistic, while concerns have been raised about efficiencies at the SARS. Policy in areas ranging from agriculture to mining is becoming even more hostile and uncertain. Global conditions are quite unpredictable and South Africa has in any event, uncoupled its growth trend from the global economic growth rate. Let any of the Treasury forecasts be wrong and the revenue shortfall will force the government into more tax hikes, more borrowing or austerity.

But the tax to GDP take is already far too high to sustain more tax increases. Debt levels have doubled and further increases will trigger rating downgrades. Austerity requires the government to decide whether it would rather cut spending on broader social protection services (more than half of the budget), the civil service wage bill (a third of the budget), or on infrastructure. Ahead of the 2019 election, the first option is a non-starter. The second will hold up the extension of jobs to loyal cadres and gouge a hole in the black middle class. The third will undermine the lucrative networks of patronage that hold the ruling party together. It is the political equivalent of choosing whether to be hanged, face the firing squad, or be sent to the electric chair.

The answer is, of course, to swiftly adopt the structural reforms necessary for higher levels of growth, but, of those reforms, we heard as little in the budget speech as in the State of the Nation Address two weeks earlier. Many politicians and analysts don’t like to hear it but the government has maxed out the economy’s revenue-creating capacity and, without liberalising reforms in labour market and empowerment policy, together with the securing of property rights, it will draw neither the capital investment nor the entrepreneurial energy necessary to achieve higher rates of economic growth.

This budget took South Africa no closer to achieving such growth or investment or to finding a way to a better future. It was rather about feeding the spending appetite of a rapacious state – at the expense of the private sector and South Africans themselves. 

*Frans Cronje is a scenario planner and CEO of the IRR – a think tank that promotes political and economic freedom. His second book, A Time Traveller’s Guide to South Africa in 2030 will be published by Tafelberg in May.       

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