LEON LOUW AND GARTH ZIETSMAN: This is how to judge today’s MTBPS

Finance minister Enoch Godongwana’s 2024 medium-term budget policy statement (MTBPS) will inevitably be followed by the usual praise that he did well in difficult circumstances. 

Having duly complimented him, conservatives will lament that he did not propose slashing unsustainable national debt, liquidating failed state-owned enterprises (SOEs), reducing the insane number of government departments, or stimulating growth by deregulation and low taxes. 

Leftists will lament that he made no provision for full National Health Insurance (NHI), did not promise government job creation, failed to nationalise the SA Reserve Bank and left white monopoly capital (WMC) untouched. 

None of them will mention the most important thing by which the MTBPS should be judged, which is whether Tax Freedom Day will be earlier or later. 

However desirable or foolish their concerns might be, none match Tax Freedom Day and none are Treasury functions. Budget policy is about how much to tax and spend. It cannot create jobs, liquidate SOEs or end controls that stifle growth. It cannot end WMC because there is no such thing except as a loony left fantasy.

Tax Freedom Day or die

What the minister does control is Tax Freedom Day. His MTBPS will be good if Tax Freedom Day is earlier in the year and bad if later. Tax Freedom Day can be thought of as the date after which South Africans start working for themselves instead of for government. If government consumes half of everything we produce, Tax Freedom Day is midyear (July 2). If it takes a quarter, it is like working for government until April Fool’s Day (April 1) every year.

Economically comparable countries generally prosper with earlier Tax Freedom Days and stagnate with later, which is clear from such international comparisons as the Economic Freedom of the World (EFW) index. The MTBPS should commit the country to returning to and improving its rank as the world’s 47th most free economy in 2000. Since then we have fallen to 93rd. Merely starting to move in the right direction, which is easy, boosts economic growth even more than having a good score.

SA’s stagnating economy during recent years coincides with later Tax Freedom Days. Our 1983 Tax Freedom Day was April 10 (27% of the year and of GDP). It regressed slowly to April 17 (29%) in 2003. Since then it regressed by 0.75 days per year to May 12 (36%) in 2023. In effect, we now work a month more for government each year than we did 10 years ago.

Are they serious?

The Treasury has “mandated Absa and JPMorgan to arrange a Global Investor Call (GIC) and a ...roadshow to engage investors” following the MTBPS. It is part of “regular post-budget and MTBPS investor engagements”. The costly international junket will, as before, be fruitful if Tax Freedom Day is earlier and a waste of time if later. 

Early Tax Freedom Days during the Mandela-Mbeki years (1994-1999; 1999-2004) coincided with high growth, whereas our later high tax Tax Freedom Days (2004-2024) coincided with stagnation. 

Since 1972 the share of national income taken by government has increased by 70%, so any decrease in the fraction of GDP consumed by the government will be positive. Godongwana will be giving a desperately needed positive message if he announces that Tax Freedom Day plus spending will be decreased by one day (0.28% of GDP) per year until Tax Freedom Day is restored to early April, as it was at the dawn of democracy.

Deadly debt

During recent years the government has resorted to deficit spending (borrowing and debt) to levels top economists such as Dawie Roodt fear might be catastrophic. Deficits enable government to spend what it neither has nor taxes. This creates the illusion of pro-growth lower taxes and earlier Tax Freedom Days.

The disaster is that it forces government to increase taxes later and divert spending from the poor (everyone) to the rich (creditors). This is a “triple whammy”. Not only must the government take more of the nation’s wealth, but it must spend less on general government because the biggest budget item will be debt servicing, with compound interest.

Debt is now the largest budget item; more than basic education, housing, health or security. Government debt averaged 54.1% of GDP in the decade to 2022 — higher than the Sub-Saharan Africa average of 43.7%. It was at a promising record low of 27.8% in 2008 before rising to a frightening record high of 72.2% in 2023.

There were large deficits towards the end of apartheid, but by 2000 they had been reversed to an average 0.35% surplus from 2000, until Covid-19 in 2019. After Covid-19, we should have had balanced and surplus budgets. In 2022 the MTBPS budgeted for a plainly reckless 4.4% annual spending increase instead of a responsible 1% or at least one day (0.3%) annual reduction. 

Ending destruction 

Budget speeches always promise higher growth and pro-growth “red tape” reduction. Finance ministers never notice the obvious contradiction that in the sessions where they present their budgets, parliament has a slew of measures, as it does now, to the opposite effect.

A global study by statistician Garth Zietsman, a co-author of this article, found that economic growth was associated with law enforcement and relaxed labour regulation, among others. The MTBPS should promise these. It could emulate British Columbia (Canada), where each new control had to coincide with the removal of two other controls. That province has higher growth than the other Canadian provinces.

Inflation is not a huge concern, but it should be. We have inflation “targeting”, with a 3%-6% target range. Few realise the serious implications of deliberately eroding our currency value. Our currency has lost 98% of its value since 1970. It declined by over 96.3% against the dollar, which itself declined by over 85%. Confidence in our currency would be restored if the MTBPS announces a new zero inflation target.

We have the world’s highest sustained unemployment rate. The real “expanded” rate is 42.6%. The real youth unemployment rate is higher than 55%, and more than 75% for young women. It is unfathomable that government is considering increasing unemployment with higher minimum wages and stricter labour laws. The MTBPS should announce the repeal of minimum wages and radical labour law relaxation, even just temporarily, until unemployment falls to Mbeki era rates below 20%. Many sources of income have been criminalised. 

Good karma now

This MTBPS will be easy to judge. If all that it does is provide for an earlier Tax Freedom Day it will be splendid. If it also promises a reversal of creeping interventionism, adds deficit and debt reduction, frees trade and has nothing for NHI, it will be superlative. If it does the opposite, it will be a death wish. 

• Louw is CEO and Zietsman consulting statistician at the Freedom Foundation and Izwe Lami.