Tax hikes won’t solve SA’s economic dilemma
17 February 2016
Posted by: Author: Rob Price
Author: Rob Price (IOL)
South Africa’s biggest challenge and Finance Minister Pravin Gordhan’s greatest priority is economic growth.
Presidential, ministerial and parliamentary scandals are usually focused on within the media, but they are often a distraction from the bigger picture.
Economic growth brings with it jobs, improvements in living standards and is the glue required for social cohesion in our fractured country. What levers does Gordhan have at his disposal to improve growth? Simply put, he is in control of government spending, revenue and the broader economic policy environment.
Government spending has increased significantly over recent years, but the returns from the outlays have been poor. SAA and the SA Post Office are good examples of this. The government lists on its website an astounding 129 state-owned enterprises (SOEs).
Attempts to resurrect numerous ailing SOEs need to be abandoned, and this does not just mean the spending trajectory must slow at the margin. Widespread cuts in inefficient departments are required and perhaps certain SOEs or government ministries need to be eliminated.
The private sector must be given the opportunity to provide better quality goods and more efficient services, which will benefit all South Africans and ease the pressure on the severely strained government budget.
The budget deficit (spending less revenue) as a percentage of gross domestic product (GDP) stands at roughly 4.1 percent, which means the government continues to spend more than it earns through tax revenue, and that the economy is going deeper into debt to finance the deficit.
A deficit wouldn’t be a major issue if lenders thought that government spending would generate better rates of economic growth and higher tax revenues in the future, but this has become questionable as government efficiency and productivity have faltered.
If we don’t prioritise budgetary spending soon, the government will run out of fiscal room to fund higher-priority spending such as on education and welfare payments – that is if we haven’t already run out of fiscal room. Increasing domestic social unrest suggests education and welfare demands will increase rather than decline, further straining the already troubled national fiscus.
And what about job losses in the public sector? More jobs will be gained over time from an efficient, productive economy, with higher rates of economic growth, than will be lost within an inefficient public sector. Yes, there will be some pain as this process unfolds, but the current path of government-funded wage growth is unsustainable and hampers long-term prospects for the unemployed.
Expenditure cuts are politically sensitive, particularly in an election year, but tough decisions must be taken if South Africa is to get out of its current rut.
Rather than make these tough decisions, the government has taken the path of least resistance for many years, increasing revenue through taxes to generate the funds required to continue to spend. We need to nip this trend in the bud – and fast.
Further tax increases within the Budget on February 24 might delay the credit rating downgrade pressure at the margin, but they won’t solve our economic crisis. In fact, tax increases will extend the problems, allow government inefficiency to continue, further hinder economic growth and increase the chances of further credit rating downgrades in the years ahead.
Much has been said about the "political capital” Gordhan has at his disposal after the political shenanigans of recent months. If he really wants to arrest South Africa’s economic decline, he must focus on proactive measures to stimulate private sector economic growth, encourage inward investment and generate policy certainty so that investors can formulate long-term economic expansion strategies.
Reactive and regressive tax increases, which provide breathing room for unsustainable government spending, won’t solve the growth conundrum.
- Rob Price is an economist at Investment Solutions.
This article first appeared on iol.co.za.