LEON LOUW: Economy will respond enthusiastically to signals that negative trends are reversed

The 2024 budget speech can and should be the U-turn that propels SA from stagnation to prosperity for all. This does not require a dramatic cut in taxes, spending or debt. All that is required is an unambiguous signal that negative trends have been reversed.

The world’s experience shows that the laws of economics reward small moves in the right direction generously. If it is clear that government is serious about implementing globally proven polices, the market responds enthusiastically with investment, employment and economic growth.

The National Treasury faces a triple problem of falling revenue, increased borrowing and debt, and higher spending. Finance minister Enoch Godongwana therefore must alter one or more of these variables.

The single most important aspect of a budget is how much wealth it consumes. Revenue is hard to target in an election year, but the burden is already excessive. Tax Freedom Day (TFD) is a measure of the overall tax burden, compared with a calendar year, to show how long it will take South Africans to earn enough to meet required government revenue.

TFD in the last budget was May 14, or 37% of GDP. The degree to which tax is a burden varies with the size of an economy. SA’s tax burden is excessive by world standards.

A heavy tax burden retards economic growth. For prosperity, the tax burden should not increase. Ideally it would decline at a responsible rate of, say, four days. The annual rate of increase has been averaging 1.12 days per year since 1996. The minister should announce a commitment to a continued long-term reduction back to an April 18 2000 TFD, or 30% of GDP.

Salaries

The proportion of government revenue allocated to salaries is high at above 50%, which is consumption of wealth instead of investment in infrastructure and services. National debt has risen to nearly 67% of the entire economy (GDP). 

If revenue is not increased, or better still reduced, spending must be reduced or debt increased. Given the extent of national debt, which has reached unsustainable (for third world economies) levels of over two-thirds of GDP, increased borrowing would be reckless.

State-owned enterprises

That leaves only one responsible option — reduced spending. In other words, government must do less. Much trimming can be done without reducing such popular items as services and welfare. The most obvious and desirable candidates for axing are failed state-owned enterprises (SOEs). They should be liquidated or sold.

SOE bailouts have been underestimated for the past two decades at over R668bn, or about 3% of the budget. That underestimate is the equivalent of 800,000 RDP homes per year. Without needless SOEs, in just two-and-a-half to four years all 12-million of SA’s destitute homeless people could be housed.

Failed apartheid dinosaur SA Airways has become a national joke, the poster child of failed SOEs. Its greatest accomplishment has been over R50bn wasted in a decade. SOE subsidies flush the hard-earned wealth of ordinary South Africans down the drain.

The government should stop emulating apartheid by trying to do what private enterprise does better. Through the budget it should redirect scarce resources productively to essential services such as policing, infrastructure and welfare.

Since most SOEs do what the private sector does better, they are superfluous. Where the SOE motive is to care for those who cannot afford market prices, there should be direct welfare instead of corruption-prone white elephants.

The government boasts, as the finance minister might once again on Wednesday, about how much welfare it provides instead of seeing the need for so much welfare as a scourge on our beloved country.

The perpetuation of policies that inflict destitution is shameful. Though basic welfare is generally regarded as a legitimate budget item, the higher priorities are policies to eliminate poverty and unemployment.

Additional extreme demands confronting the minister include the electricity Integrated Resource Plan (IRP2023) and National Health Insurance (NHI). The budget should not, and probably will not, provide for them, since meaningful provision would increase expenditure beyond anything realistic.

Most experts and the Treasury have recognised that NHI is unaffordable. IRP2023 goals will be achieved if the National Energy Regulator of SA (Nersa) and related controls that stifle Eskom and private enterprise are terminated.

Electricity catastrophe

The minister should, but will not, recognise the full implications and causes of the electricity catastrophe. The economy has nearly doubled since blackouts started in 2007. Energy “security” required generating capacity to do likewise. Instead of growing by about 40% from 22,000 gigawatt-hours in 2007 to 30,000 GWh, power production fell to 18,000 GWh.

The country is cursed with 30% less power than it should have. Without electricity shortages the average South African would have been nearly 50% wealthier.

What should the minister do? The answer is obvious. He should abolish the regulator, Nersa. It is a monstrous disaster. Eskom should be liberated from Nersa’s shackles to run, restructure and set prices as it wishes in a normalised competitive market, as in most advanced economies.

Another pro-prosperity budget announcement would be a radically reduced cost of regulation. The burdens imposed by regulatory agencies are extreme and affect the poor and those trying to enter the economy disproportionately, while favouring a privileged few.

Among worst offenders are the Financial Intelligence Centre (Fica) and the Competition Commission. Fica throws grit into the gears of the economy without preventing financial crime. It should be confined to only what can be shown to have benefits exceeding costs.

Far from promoting competition, the Competition Commission stifles it. It denounces normal business as “collusion” and bans competitive behaviour such as the right of competitors to co-operate. Most destructively, it bans the right of consumers to vote with their rands for suppliers of their choice.

The minister should put an end to racist myths about how much of “the land” or “the economy” belong to “whites” or “blacks”. He should point out that the numbers that float around are nonsense. They lack the most elementary requirements of truth, such as what “the land” means. Is it by area, value or numbers?

Do bald and amorphous assertions refer to farms, factories, houses, offices, roads, parks or trusts? Does “the economy” refer to the stock exchange, companies, all enterprises, SOEs, personal assets or government in all its forms? Racist nonsense on these questions is destructive and divisive. It pressurises the minister into adopting regressive policies. 

What the budget should say is clear, but will it? Godongwana has done his best in previous budgets under abnormally tough circumstances. On Wednesday he owes it to the nation to do better than his best.

• Louw heads research, policy and property rights institutes Freedom Foundation and Izwe Lami.