THE South African economy is said to be between a rock and a hard place. Tax revenues are not sufficient and raising tax rates on earnings will reduce the amount collected as people take evasive action.
Raising VAT will slow the economy. There are too many people in debt who can barely survive. Then ratings agencies may downgrade the nation and interest rates could rise.
South Africa needs to investigate whether there is a shortage of money in circulation. This is a cyclical thing in all nations.
- When people repay bank loans, money goes out of spending circulation.
- When people pay taxes, money goes out of spending circulation.
- When people get nervous they save, and money goes out of spending circulation.
- When people put money on standby, money in spending circulation reduces.
- When people import more and export less, money goes out of spending circulation.
I know of more than one business which is being held down by non-payment of amounts due.
This can be either:
Because government departments are spending faster than their budget allocation and are having to wait to pay their bills
OR
Because there is not enough money in circulation for people to get paid, or for them to pay their taxes, or each other.
If this is the case, it would not be necessary for the Treasury to borrow money when that same money can be created at zero cost. It just takes a click on a spreadsheet.
At the end of the day, that is how all money is created. It’s just a question of why, when, how much, and on whose authority that additional money is created. All economies need more money as they grow, and to cope with low level inflation.
If the needed money is created, we need to consider how best to distribute it.
It could go to SARS, but that may cause a political uproar and it would not grow the economy that much.
It would be better to use it to reduce VAT for a while, to achieve an instant improvement in national spending and output. That way, everyone gets some whenever they spend. Every small business gets a boost.
Later, when the benefits have come through, income tax rates for next year can be reduced because the tipping point on tax collection has already been passed, according to a recently published paper. The current situation is that higher tax rates equal less revenue. People increasingly look for, and find, ways to pay less tax.
What this could lead to
The likely outcome, after a short period of public education before implementation or announcement, would be an immediate boost to confidence, fewer people seeking ways to avoid paying tax, and soon, more tax revenues and the avoidance of a recession.
A better credit rating for South Africa could reduce interest rates. The rand would rise in value and prices inflation would fall; just stop Jacob Zuma from announcing ever more spending plans until the economy has recovered.
I sounded out a few friends on WhatsApp about this. The overwhelming view is that it makes sense.
Why do governments not do this?
I have it on good authority that the Bank of England and UK Treasury are looking at such ideas, but they are hugely afraid of being accused of ‘printing money’ in an inflationary way. All my readers say the same.
My suggestion
Clearly there needs to be a written mandate guiding the level, timing and method of distribution of new money.
Clearly any economy needs new money due to ongoing growth and, to an extent, low level inflation. Banks can lend it into circulation, but South Africans already have more debt than they can manage. Less borrowing is a good idea.
It is only a question of how, when, why, and to whom the new money is given. I am talking of creating debt-free money here, not asking the banks to lend more because that debt-dependence is not what the South African economy needs.
This is much safer than allowing the banks to create it anyway. A measured amount can be delivered, and it has an immediate effect, helping every small business.
The longer term
In the meantime, while all that is being mulled over, I suggest that an (independent of government) committee of economists be formed, to which the Treasury must put forward its future suggestions on which kind of money to create, when, how much, and how distributed, with a justification and relevant data.
That committee can approve or reject the money creation proposals. The committee will be mandated to keep the rate of inflation within certain boundaries.
These measures are essential to success.
Postscript
Treasury and SARB both have a few copies of my book which explains this in detail, and there are more reform options to consider later. These include pieces on currency stability and a critically important new lending model for savings, pensions, and finance for housing and business. Review earlier essays of mine by searching on Google under 'Edward Ingram Fin24'. You can email me to order a printed copy of the book.
- Edward C D Ingram is the founder of the Ingram School of Economics, a school which is growing in influence. He is also provider of the world's first ever certified course in macro-economic design and management. Contact him on Skype at edwarding2.