The budget — how to steer between the extremes of patronage and prudence
In the world’s most unequal society, the budget offers an opportunity to embrace society and environmental sanity
After investigating the "massacre" (as termed by both the Democratic Alliance and ANC Youth League) of more than 100 mental health patients deinstitutionalised from Life Esidimeni so as to save R200/day each, health ombud Malegapuru Makgoba advised that a "sufficient budget should be allocated for the implementation" of proper care.
But Finance Minister Pravin Gordhan had raised healthcare spending only 5.6% last year and provincial hospital services faced a 2% cut (of nearly R600m). The healthcare inflation rate, according to the Medical Aid schemes, was 11% and thus in real terms Gordhan slashed provinces 13%, and cut 5.4% from the public health sector as a whole.
To judge such spending decisions, journalists rely on a small army of self-described "economists", a profession whose familiarity with the actual economy was tested in 2008 and found wanting. Iraj Abedian warned Gordhan’s predecessor, Nhlanhla Nene, on the front page of Business Day that social grants should be cut "way below inflation", which Nene immediately did, while generously relaxing exchange controls on the rich.
Credit ratings agencies like Standard & Poor’s typically demand lower budget deficits (‘fiscal improvement’), shrinking to 2.4% of GDP next year. Threatened with a potential downgrade to junk status, Gordhan cut the 2016 size of inflation-adjusted social grants and state budgets for housing, municipal services and even (amid a drought) water. The January 2016-17 inflation rate was 6.8%, but a standard food basket for low-income families rose 16.5%, outstripping last year’s average 7.8% monthly increase (R25) in the child-support grant (to R350) and the foster care grant’s measly 3.5% rise (to R890), the payment of which is soon threatened by maladministration.
This year, leading tax lawyers and consultants are suggesting Gordhan raise value added tax (VAT), more of which is paid by poor people in relation to their income. Business Day’s deputy editor, Hilary Joffe, argued last month that our 14% "rate is quite low by international standards", and "you have to look at the whole fiscal package including the spending side, to see whether an increase in the VAT rate really would hurt the poor disproportionately. SA’s budget is already one of the world’s most redistributive, according to a World Bank study."
The latter claim is sloppy fake news, for Bank researchers refused to consider Pretoria’s crony-capitalist spending (eg infrastructure mega projects) and the impact that state bias has on indirect income and wealth. Whenever I boarded an SAA airplane last year, for example, taxpayers donated a R600 subsidy towards my ticket (R5.6bn in subsidies for 9-million passengers); when I boarded the Gautrain, there was another R90 gift (a R1.5bn subsidy covering 17-million trips).
Operating subsidies of less than R5 a trip went to working-class Metrorail commuters (2.4-million each day), with kombi passengers getting nothing.
Instead of raising VAT, could Gordhan restore higher taxes on rich people and corporations? The "1%" ultra-wealthy have done well since 1994, thanks to steady erosion of exchange controls, the resulting high interest rate and the stock market bubble (the world’s second-largest measured as market capitalisation/GDP). The 1%’s share of national income was, thanks to apartheid, an impressive 12% in 1994. By 2008, this rose to 20%, the highest in a 2016 World Bank database.
Corporates should contribute more, for in an economy that last year produced R4.4-trillion worth of gross domestic product (goods and services), business taxes accounted for a paltry R200bn (4.5% of GDP) of R1.2-trillion of state revenues. Income taxes provided R440bn followed by VAT at R300bn. Ten years ago, companies paid at a 7% rate of GDP, and in 2008 the take from companies was 9% thanks to the commodity boom.
All along, Treasury lowered corporate taxes: from 56% of distributed profits in 1994, to 43% in 1999, to 38% in 2005 and then down to 28% by 2013. Restoring taxes back to 7% of GDP would raise R110bn (five times as much as the 1% rise in VAT proposed by elites). By comparison, the #FeesMustFall-to-zero demand would cost R30bn annually, according to Treasury staff – about six times more than Gordhan added to last year’s budget after national protests.
Can local firms afford higher taxes? Their rebuttal is that the current 28% rate (before loopholes) is higher than the world average – true, world rates have also dropped alarmingly. However, amongst peer emerging-market economies, the profitability of SA firms has usually been second-or third-highest, even during a catastrophic 2015 when mining went belly-up. Even then, according to last July’s International Monetary Fund review, Johannesburg corporations claimed a 23% return on equity.
Source: International Monetary Fund Article IV Consultation, July 2016
One reason for such high profits is the prevalence of tsotsis in Sandton, akin to the wolves of Wall Street. Perhaps were they not employed by the same banks, the loudest local economists might celebrate how currency-manipulation fines of 10% of annual turnover (eg Standard Bank potentially penalised R9.1bn) could be used to raise state social spending? Fines are surely also needed against persistent ‘illicit financial flows’ by the likes of Lonmin, De Beers and MTN?
Instead, claim economists like Investec Wealth & Investment’s Brian Kantor, Gordhan "needs to recognise the cost savings were the private sector allowed to deliver more of the services that taxpayers fund."
Kantor is silent on the obscene corporate overcharging on outsourced state contracts as revealed by Treasury’s former head of procurement, Kenneth Brown. Last November, Brown suggested clawing back R233bn each year.
Then there are Treasury guarantees (R683bn) to undergird state-owned enterprise (SOE) borrowing, including Eskom’s R350bn exposure for the long-delayed Medupi and Kusile powerplants which incorporate dubious coal-supply contracts with Oakbay (although thankfully Eskom’s desired borrowing for Russian nuclear plants is not yet included). Other SOEs given these guarantees include the mismanaged Sanral, SAA and Transnet.
The latter’s self-destructive expansion is based on the mining industry’s R803bn investment strategy to export "coal (18-billion tons), chromite (5,5 tons), platinum (6,3 tons) and palladium (3,6 tons)" through Richards Bay (planned during the Ramos-Molefe leadership era before coal’s 50% $-price crash since 2008, with no regard to climate change). Another KZN white elephant is the R250 billion expansion of Durban’s port-petrochemical complex, which the province’s Premier Willies Mchunu last November still insisted would increase container traffic (mainly on dangerous trucks) from 2.5-million to 20-million a year by 2040, a planner’s fantasy.
These two delay-prone, carbon-intensive mega projects are, respectively, the first two presidential infrastructure co-ordinating commission strategic integrated projects promoted by the National Development Plan so beloved by economists. KZN’s herd of white elephants also includes the wasteful R6.4bn Durban 2022 Commonwealth Games.
In the battle between the forces of fiscal patronage (the Zuptas, especially parastatal managers) and fiscal prudence (Treasury neoliberals), the latter have been extremist in imposing austerity – except when it comes to most dubious mega projects. In the world’s most unequal society, the budget offers an opportunity to move away from both the extremes and instead embrace society and environmental sanity.
• Patrick Bond is professor of political economy at the Wits School of Governance.