CHRIS HART: The betrayal buried in the budget

The 2022 budget continued to reflect an absolute cluelessness about the economic needs of our country. It once again demonstrated the destructive thinking we have seen in the past 10 to 12 years, with the government’s increasing anti-growth trends and measures.

Against the backdrop of the worst unemployment crisis in the world and the self-inflicted destruction that Covid-19 regulations inflicted on the economy, the budget was again a catastrophic manifestation of the backward thinking that is perpetuating and compounding the problems SA faces.

This is a budget that will continue to suck value out of the economy. It is an anti-growth budget, because the government is taking a bigger share of the cake than before — it’s already too big and it’s expanding.

We see a switch of resources from high economic multiplier private sector activity to much lower economic multiplier public sector activity — shifting resources from a capable private sector to an incapable government sector.

Many of the foundations of this budget catastrophe had been laid more than a decade ago, and it seems that in his first budget finance minister Enoch Godongwana is continuing to preach the short-term populism of the ANC’s economic suicide mission.

Fundamentally, for more investment to take place in SA economic conditions must be attractive to investors both internally and externally. Without that investment we will not get growth.

Let’s start with a look at our rates. They are way too high and uncompetitive both in terms of the actual tax rates and the overall tax-take burden on the economy. They place SA in an uncompetitive position compared with other emerging markets and regional peers.

This is compounded the absorption of our high taxes by an incapable state instead of us using the revenue collected to deliver services of value. Other high tax jurisdictions do at least deliver services that are generally regarded as being of reasonable quality.  Ours aren’t, and to demonstrate this just look at state education, healthcare and security. These are all essentials that those who can afford to do so are compelled to acquire from private providers.  

With the state consuming vast resources while delivering services of such little value, is it any wonder that we remain so uncompetitive? At the same time, we see that government continues to increase the financial cost that comes with the administrative requirements of its overregulation.

Many regulatory costs are unique to SA; they are found nowhere else in the world. Financial repression — the term we economists use when states channel scarce resources to themselves and away from productive uses —  is consequently extremely destructive in SA.

Once again, this makes investment unattractive. This is especially so in the small to medium enterprise (SME) sector, which is the true engine of employment growth in any soundly managed economy. Conditions for SMEs and start-ups are especially harsh and oppressive in SA.

The National Treasury’s definition of what constitutes a micro, small or medium enterprise is way too small — especially in a global context and with the fierce global competition we face.

The crushing of so many SMEs during the lockdowns was disproportionate and has intensified our jobs holocaust. SA should be considering tax and regulatory holidays for start-ups and SMEs to get the job creation engine going. Productive, growth-enhancing jobs will not come from the government or big business.

Meanwhile, we carry on into oblivion with exceptionally destructive taxes such as capital gains tax, transfer duty on property and death duties, which all target capital formation. These taxes convert capital into consumption at a time when for our economy to grow we desperately need that capital for investment.

This is especially so at the household level, as it is out of household capital resources that SMEs are spawned and nurtured. The damage these taxes directly cause is incomprehensible in the context of our unemployment emergency. It is like us eating all the seeds and then wondering why we aren’t getting harvests.

Of course, the budget wasn’t all bad. Some sanity prevailed, and government is aware of at least some areas where it can ease its own stifling overregulation. On the face of it, I had welcomed the announcement in the state of the nation address that our president has decided to establish a red tape bashing unit within his own team, and let us hope it crushes more bureaucracy than it creates.

Certainly, there had been more room in the budget itself for initiatives to follow through on the president’s words. Maybe they want some proposals?  Are they asking for any? I have no shortage of suggestions. Will slashing red tape favour the more powerful lobbies rather than the voiceless and powerless SMEs?

There was a recognition in the budget of the importance of infrastructure investment and lots of welcome language of tough love against the profligate state-owned enterprises (SOEs). But words are cheap. We have seen this movie before.

The cut in corporate tax — signalled a year ago and now being implemented — is a welcome, belated response to the reality that our taxes are far too high and are uncompetitive. However, the very limited cut shows that the Treasury is being reactive rather than proactive.

Being proactive would be to slash the corporate tax rate to a level that is competitive and attractive — to leap ahead. SA does not need the very lowest global tax rate or the tiniest tax burden. But SA does need the right signals to broadcast to investors that it takes the broader interest of economic growth into account.  

We are failing to give credibility to the political mantra that SA is serious about attracting investment and generating employment and growth, rather than just trying to resolve the state’s own immediate problems — and to hell with everyone else’s.

The cut in the corporate tax rate is still to be welcomed. If the Treasury is looking to really improve the investment climate, though, it should rather be looking at a dividend tax of 20%. The economic effect of the dividend tax is to directly raise the investment hurdle rate, which is an unjustifiable, self-inflicted and damaging barrier to creating jobs. This in a context where investment needs to be encouraged rather than penalised or scared off.

The budget did precious little to boost capital formation or investment, the painful lack of which is at the core of our unemployment problem. It was crowd-pleasing, but not economically sound.

This was a “Great Leap Forward” to advance welfare in SA and was all about poverty alleviation. The economic effect of poverty alleviation, however, is to shift resources to consumption, which is anti-growth.

In contrast, poverty reduction involves the shift of resources to investment. While there needs to be a balance between the two, essentially SA has reached the point where poverty alleviation has become counterproductive, and the chosen path is a poverty perpetuation policy, crowding out investment through the movement of scarce resources towards consumption.

It makes sense to build a factory to create jobs, but if all the resources are handed out as grants that means you can’t build as many factories. Fewer people employed will mean more grants are required, feeding the vicious circle that leads to national bankruptcy.

So, while it masqueraded as a caring, benign budget, this was yet another budget that was exceptionally cruel to the average person in SA, struggling with joblessness and poverty.

If we did not have an unemployment crisis and a poverty crisis we could genuinely have described this as a steady-as-she-goes budget. It perpetuated a few certainties — mainly the certainty that we will continue to export our tax base and will continue to hollow out the resilience of SA as a country.

But, against the very real context of rising poverty, rumbling social unrest and catastrophic unemployment levels, this budget was self-serving and solidly tone-deaf.

No change there, then. 

• Hart is executive chair of Impact Investment Management.