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As SA Govt. heads toward fiscal cliff, reform is desperately needed


According to the South African Institute of Race Relations, the South African Government looks to be running out of money.  The IRR anticipates that Government revenue will account for almost 30% of GDP in 2015/2016. Alec Hogg spoke to Boitumelo Sethlatswe, Head of the Centre for Risk Analysis at the IRR.

One has to ask, how did we get here and how are we going to get out of it?

This has long been a worry at the IRR.  Government expenditure is rising at such an exponential rate.  Although Social Grants have been really great for families that need that cash injection, they’ve been a huge expenditure.  The Budget Deficits that we have now are almost on par with the ones that we saw close to the 1976/1977 uprising.  Although we are getting a bigger chunk (30% GDP) of Government Revenue, people are more burdened by tax than ever before.

What is the worst that South Africa has been?  What does that 30 percent mean and why is it relevant?

We tracked trends looking from 1976/1977 to the present day.  We know that the numbers were quite dismal in 1976/1977, but leading up to 1990, we saw an increase.  It went from roughly 19 percent to 23 percent.

The government is taking a bigger share of the economy.

Yes, more and more.  In 2004, it had plateaued at about 23%.  During the period 2004-2014/2015, that number has gone up to almost 30%, which we thought we’d be seeing in 2015/2016.  There’s a bigger share going into the coffers, but we should also consider that the public sector is currently in negotiations.  What is the outcome there?  If the Government cedes to any of the demands that are being asked, that will increase Government expenditure as well.

How high can it go?  Where do the alarm bells start ringing and where do we get to a Greek-type situation?

I think that the alarm bells need to be sounded right now.  If South Africa was a typical emerging market, we could for example; run our deficits higher if we knew that we were putting money into our infrastructure.  We look at issues like Eskom, for example.  That is really the problem here.  We have an environment in which our growth levels are so low.  Even the four percent that we’ve been told is our Budget Deficit, which we can expect for the 2015/2016 yea, we’re saying it’s estimated on overstated growth numbers and we know the growth numbers are quite poor.  There doesn’t seem to be a recognition that we need to change the policy environment in order to change that.

We have been spending more as a Government, but we haven’t had the impact of higher economic growth and that brings you the worst of all worlds because you have to keep funding that spending but you’re not getting your tax take?

We looked at the tax base.  People who earn R500, 000.00+ account for eight percent of taxpayers but they account for 33% of the taxable income.  Yet, they pay 54% of the tax.

Will they be taxed higher?  Are there views that that might happen?

That’s one of the views, which has been put out there.  There aren’t many options open.  We can’t cut expenditure.  Beside the fact that it’s political suicide, all the social protections that we have in place account for almost 60% percent of our Budget.  Whittling around with the other 30-odd percent – what difference would that actually make?  We wait and see in February and later on in the year to see what the Minister will have to say – where he can make concessions.  At this point, they’re in a tight spot.

Ideologically, a certain path is being followed which has now been shown to not lead to economic growth.  Are you anticipating that there will be a reassessment?

Ideally, that is the best situation.  We want to see certainty in the policy environment but it’s not very encouraging.  When you saw the ANC speaking last week about land and foreign ownership of land; those are very discouraging remarks that are being made.

We did see the President send back a silly Bill to Parliament.

Yes, it’s the MRPDA.  We did see that.  It took so much time for that to be reconsidered and for him to send it back.  We’re not seeing the policy flags that we should be seeing in an environment where we want to increase economic growth – therefore, increasing employment as well as the tax base.

South Africa seems to mirror Italy. No growth for 20 years.  Zero GDP growth.  Government debt – up threefold.  Now, they’ve hit a brick wall and they’re saying ‘we’re going to have to change our labour laws/labour inflexibility.  In other words, give people a chance to enter the labour market and that causes economic growth’.  Are those the kinds of issues, which you are focusing on at the IRR?  Are you suggesting that we should be seeing changes?

Definitely.  We advocate absolute reform in the labour market.  In South Africa, it’s been quite sad.  We’ve protected so many rights except the right to work.  We see interference.  That relationship between employer and employee doesn’t work.  We need to let people work for the amount of money that they are willing to work for.  Certain things, such as minimum wages, actually shut out of the market rather than attract them.  We’ve seen the failed youth incentive that has been passed around.  On one hand, that shows a recognition that our labour market isn’t working, so we need to do something about it.  The point is not more Government intervention in the labour market, but rather allowing people to choose the amount they’re willing to work for and therefore, allowing more people to enter the market.

It’s interesting.  One often needs to hit rock bottom before changes occur.  If one looks at the numbers that Finance Minister Nene is trying to juggle later this month, maybe rock bottom has been reached and perhaps, what Boitumelo Sethlatswe is suggesting will be brought to fruition at some time in the future. 

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