Santa Claus Has Left The Building.

The ruling class’s incessant ululations in support of President Zuma, as reflected in the media, neglect a few rather important issues, of which much the most important (and, therefore, the least examined) is the devastation of South Africa’s fiscal state.
The Procurators of the Fisc are not unimportant. We know, in our own personal lives, that we cannot spend or borrow endlessly. We therefore know that there must be some sort of limit to fiscal irresponsibility. On the other hand, “fiscal responsibility” is a kind of mantra of the reactionary cadres who seek to control public opinion, and it is therefore rightly viewed with suspicion. Suspicion is appropriate, but, obviously, not dismissal.
What is actually going on in our fiscal state?
It is frightening. In 1994 the departing National Party government left the ANC with a budget deficit of over 9% of gross domestic product. There is little doubt that they hoped that this would promote an economic crisis which would bring the ANC down. The ANC first reprioritised spending, which over the next two years cut the deficit to 5,2%, and then cut back on increases in public spending, which over the ensuing six years eliminated the deficit altogether in a policy mendaciously called “Growth, Employment and Redistribution”, although the policy was not actually intended to do that. However, in fairness, after the GEAR policy had been completed, economic growth rose above 4%, unemployment fell, and there was considerable redistribution of wealth via social grants, so while GEAR was a misnomer, its object was indeed eventually accomplished.
But that took eight or nine years, and that was happening in a time when the global economic crisis was restricted to peripheral countries and industries; Mexico, the Asian Tigers, Russia, Argentina, the Anglo-American “dotcom” bucket-shops.
In 2009 we are looking at a budget deficit of 7,8%, up .2% on the previous calculation and this probably does not take into account additional expenditures undertaken since, such as an above-inflation across-the-board increase for the public service and some substantial short-term increases in antiretroviral expenditure. Call it 8% and have done.
We got there through a combination of the economic crisis, the government’s flat refusal to do anything in response to the economic crisis, and the government’s irresponsible spending in ways which do not respond meaningfully to the economic crisis. As a result, we are borrowing a vast amount of money to finance, essentially, the same economic policies as before, while the economy shrinks and unemployment has risen from about 28% to at least 33% (the Stats SA measurements are almost certainly fraudulent, since they do not show the million additional unemployed we have at the moment).
It is possible that the economy would have shrunk still more had the government not indulged in spending increases, but this is unlikely, as most of the new state spending goes towards the middle class and the rich, and this probably generates more imports rather than more employment in South Africa itself. As a result, if we had not had these increases, we might have a budget deficit of around 6%. If we had increased taxation by about 5% (as an emergency measure which could be reduced once the slump ended), we might then (without significantly harming long-term growth) have a budget deficit of around 4.5%, which is more manageable although still embarrassing. In other words, a completely conservative response to the crisis (not overspending and modestly increasing revenue) could have reduced the problem significantly. It is clear that the decision not to do these things is not actually a decision; it is rather a refusal to decide.
But why is this a problem? A budget deficit of 8% means that the government is borrowing 8% of the nation’s annual product this year in order to finance its running costs. The government’s total expenditure is about 40% of the nation’s annual product. Therefore, 8/40, or 20% of the government’s spending is being borrowed. Imagine if you had to borrow to meet twenty percent of all your spending. Wouldn’t you consider yourself in a problem?
That’s for 2009. In the longer term, when you borrow money, you have to pay interest on it. Let’s say the interest rate is 10%, to simplify; that means that next year, and every year thereafter unless the debt is paid back, the government will have to pay 0,8% of this year’s GDP to the banks from which they borrowed the money.
Next year, let’s hope, the economy will stabilise. (Maybe it won’t, of course.) In that case, corporate profits will rise considerably. Corporate profits provide about a third of the government’s revenue through corporate taxation. In other words, it is perfectly possible that although the economy has shrunk this year and will probably not grow in 2010, and income tax and VAT will therefore not grow very significantly, there could be a rise in revenue from corporate tax which could be as much as 2% of GDP. Meaning that the present 8% budget deficit would fall to 6%. But, unfortunately, there would then be that 0,8% interest on the previous year’s borrowings. This would push the budget deficit up to 6,8%.
Now, at this point, it is possible that taxation might be increased next year. A prudent person like Pravin Gordhan, who understands taxation if he understands nothing else, could certainly attempt this. Note, however, that because revenue from all taxes is only 40% of GDP, it takes a big increase to make a difference. If we assume (not quite accurately, but it’s convenient) that the revenue split is 33% company, 33% VAT and 33% income tax (in other words, each representing 13,3% of the 40% of GDP), then how would taxation be made to work? Firstly, it’s probably politically impossible to increase VAT (and an increase in VAT, because it hits the poor hardest, would also be most likely to damage economic growth). Secondly, if company profits have been low, then companies want more profits. Increasing the tax on their profits substantially would be extremely unpopular and might lead to job cuts (the natural corporate response to almost everything). Realistically, too, corporations have much more influence in the Zuma administration than in the Mbeki administration, so they would probably lobby for no cuts. So that leaves only income tax.
To increase income tax in order to reduce the budget deficit to 6%, it would therefore be necessary to push income tax up to 14,1% of GDP. That means raising income taxes by about 6% of their current value. So if you are paying, say, R40 000 of your R100 000 salary, you would then be paying R42,400. It’s not a monstrous amount, but it’s still quite substantial. You’d notice it, and you’d be cross with the government unless they had run a mammoth we-must-all-make-sacrifices campaign, which they haven’t. So, therefore, significant tax increases are unlikely. Gordhan doesn’t have the political clout, and nobody else in the Cabinet has the knowledge or the will.
Instead, it’s quite likely that spending will increase. It would be very unlikely for spending to be held at the level of inflation, and since next year the economy is unlikely to grow at all (to be precise, it will seem to grow substantially, but this will only make up for this year’s contraction, and the disruption caused by using the World Cup as a pretext for laziness and absenteeism might reverse that) a 1% above-inflation-level increase means a 1% increase in the deficit. Which means that next year the budget deficit will be 7,8%.
Gaah! That means a 0,78% debt servicing increase in 2011! In other words, things will be nearly as bad in 2011 as they are going to be in 2010! How much of a problem is that?
Well, we may assume that the economy will grow a bit. Let’s be reasonable and suggest that it grows at 2%. (It takes time to restore confidence and infrastructure after the collapse of a boom.) That would probably mean that revenue would rise — by .8% of GDP. But that only erases the cost of increased debt servicing. In other words, assuming that there was no additional expenditure in 2011 over and above the expenditure in 2010, the budget deficit would remain essentially the same — 7,78%. But by this time, it’s almost inconceivable that people would be happy with another year of spending restraint. It’s much more likely that by 2011 there will be strong pressure to spend, spend, spend, especially on salaries for the upper classes and middle classes and on projects which grant cushy tenders to white-owned BEE-front companies. In other words, on corruption and bribery, which could eat up as much as 2% of GDP.
And if that’s the case, then the budget deficit could easily rise to around 9,5%, above what the apartheid state lumbered the ANC with. Please notice that this is all assuming that in 2010 we have a very cautious fiscal policy. If we were less cautious we could be in trouble earlier.
The point is that the higher the budget deficit gets, the harder it is to reduce. The temptation is to borrow more rather than less. The problem is that to cut the deficit you must either cut spending or increase taxes, and a government is squeezed from both sides. (It doesn’t help that in the middle of the crisis Barbara Hogan is privatising ESCOM for the peppercorn fee which you’d expect in an economic crisis, eliminating one way of gaining revenue with immense deftness while ensuring that the vast amounts milked out of the consumer by ESCOM will pour into foreign pockets instead of into the state’s coffers.)
The end product, therefore, would be a rapid rise in the budget deficit, and a comparable rise in the cost of debt servicing. This would cause a collapse in confidence in the sustainability of the fiscus, which would cause a run on the rand, which would cause a need to increase interest rates, which would raise the cost of debt servicing.
Within a few years, this would mean that however high spending went, the cost of debt servicing would overtake it. In other words, state spending would become largely devoted to servicing the debt, with all other things as minor additions. (This was what happened in many African and Latin American countries in the 1980s and 1990s.) Then there would be cuts in social services, which would breed popular resistance (probably blindly following whoever shouted the loudest, and the loudest people in South Africa are the rich people who clamour for privatisation and cuts in social services).
This can be avoided by dealing with the crisis now. The way to deal with the crisis now is to selectively restrain expenditure (that is, make sure that spending increases in areas likely to promote real indigenous economic growth) while increasing revenue via taxation (especially income tax and corporate tax wherever possible). If this is not done within a couple of years it may be too late to escape the debt trap.
Of course, many affluent South Africans endorse the debt trap (just as affluent Americans did under Bush) because it leads towards an attack on social security and therefore leads towards reduced wages and cheaper consumer goods). So all this may actually be a deliberate policy on the part of the people behind Zuma. If we had any intellectuals or any investigative journalists in this country, someone might look into that. But all you have is the Creator, alas, and that ain’t enough.


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