Principles for Pravin

2013-02-27 07:28
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Pravin Gordhan. Foto: Sapa ~ SAPA
ALL over the globe economies are struggling with too much public debt and not enough “fiscal space”.  There have been many years of excessive public spending, but long years of austerity lie ahead for these economies. 

In an effort to restore private sector growth, tough choices will have to be made about where to cut spending and which reforms to implement.
 
Against this global backdrop, Nedbank Private Wealth economist Madelet Sessions outlines what she believes are appropriate principles for optimal fiscal policy and evaluates the  government’s policies against these guiding principles:
 
• Revenue collections and expenditure policy should aim to level the playing field and provide equal opportunities
• Policy should aim to create an enabling growth environment
• Expenditures should, as far as possible, be matched to funding sources
 
Levelling the playing field – equal opportunities
 
The lack of equal opportunity is not a uniquely South African phenomenon. It is often a legitimate outcome of a free market system that rewards individuals for creating, or producing, goods and services valued by society.

While we recognise that this is not the case locally, these are principles about policy in general and not about South Africa specifically. However, society benefits when all its members are allowed an opportunity to compete on the same terms.
 
These principles include:
 
• An education system that provides opportunities and skills so that even the poorest member of society can actively participate in the mainstream economy;
• Low barriers to entry (or exit) that would allow anyone who sees an opportunity to pursue it without fear of the consequences should they fail; and
• A social safety net which provides certainty to those that take risks but fail, and ensures that the most vulnerable in society are provided for.
 
Enabling a growth environment
 
Economic growth is key to alleviating poverty and improving living standards for society. As such, policies aimed at enabling sustainable growth are imperative.
 
These include:

• Shared infrastructure provided efficiently at low cost to the highest possible standard to reduce the cost of doing business.

When the cost of doing business falls, more businesses become economically viable. This enables competition between businesses to provide the mix of goods and services that society demands at the most competitive prices. 

This, in turn, creates employment opportunities and improves living conditions.

• Reducing uncertainty is positive for the private sector as entrepreneurs take economic risks to earn risk-adjusted after-tax return on capital invested. 

More risks result in higher required returns and fewer attractive investments. Lower risks mean there will be more opportunities worth pursuing.

In general, authorities/politicians should aim to minimise risks that entrepreneurs face. More specifically, fiscal authorities should aim to provide certainty on tax policy – effective management of expenditures can assist greatly in this regard.
 
Matching funding and expenditures
 
Current expenditures should, ideally, be funded out of current revenues. Authorities should, as far as possible, avoid saddling future generations with debt for current expenditures from which they will derive no benefit. 

Any borrowings, ideally, would be for investment purposes only. In time, the faster growth achieved as a result of the investments will generate the tax revenues to repay the capital investments with interest.

Incurring debt and interest payments to fund current expenditures leads down a very familiar and eventually unforgiving road.
 
By judging South Africa’s policy choices against these three principles, one can only conclude that there remains room for improvement.
 
South Africa’s taxpayers get very little value for money spent on education.

Society ought to demand a fairer shake from politicians/teachers’ unions for their taxes – perhaps ideas could be borrowed from the very successful Swedish model such as universal school vouchers, competition between public and private schools, and parental choice. 

An investment in human capital is essential to provide poorer citizens an opportunity to compete on an equal footing in the labour market. 
 
Recent decisions on taxes do not uphold the principle of a level playing field. Dividend withholding taxes are not payable by pension fund investors. This discriminatory tax raises barriers to entry to private entrepreneurs in favour of large publicly held businesses. 

Higher taxes for smaller enterprises increase the required pre-tax return, but not for a larger publicly held organisation. This skews production (and profits) in favour of the latter.
 
Since the financial crisis, businesses have been faced with substantial uncertainty. This is clearly evident from large cash balances on corporate balance sheets and the reluctance to invest. 

To support the economy, National Treasury budgeted for lower revenues while maintaining expenditure and raised debt to fund the shortfall. 
 
We fully support the need to do so. However, what has been disappointing is that spending was not allocated to investments in growth enhancing infrastructure (where backlogs exist), but was instead diverted to government consumption. 

In addition to taxing future generations, authorities (as a result of poor expenditure management) have increased the likelihood that taxes will be raised. This reduces the incentive to invest as fewer projects are profitable when authorities collect higher taxes from the economy.
 
Although we highlight a series of policies where, in our opinion, South Africa authorities have contravened our guiding principles, we also admit that there are very few examples globally of “model” fiscal authorities. 

By and large, fiscal authorities disregard these principles. In fact, despite our criticisms we believe the South Africa fiscal authorities are not given sufficient credit for the good work they have done over the last two decades. 

However, we would prefer to see a greater sensitivity to these guiding principles in discussions about the future of fiscal policy in South Africa.
 
* Visit our 2013 Budget section for full coverage of Finance Minister Pravin Gordhan's National Budget speech.
 

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