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Is welfare the best medicine for inequality?

01 March 2021 Gareth Stokes

The overwhelming sense we got after watching South Africa’s 2021 National Budget speech was that our beautiful country is in for another year of the same nonsense. We were among a handful of taxpayers who felt more than a bit miffed by minister Tito Mboweni’s flippant and at times irreverent delivery. Although the minister acknowledged the fiscal debt crisis facing the country, he barely mentioned the growing herd of elephants in the room. Eskom and SAA remain unresolved and the as yet un-costed National Health Insurance (NHI) initiative did not even make it into the text.

This is not Greece; we do not do austerity…

Something that should concern the growing number of local welfare recipients is that government believes ‘more of the same’ will miraculously wrest them from poverty and steer the country away from the fiscal cliff. The minister gleefully crowed that South Africa was not like Greece and he would never push forward with an austerity budget (sic). What irony that a reshuffling of dwindling resources is needed to give the appearance that government is spending more on the populace. Our reality is that almost of quarter of every tax rand collected will be going to servicing our growing debt next year. And our future, assuming everything goes to plan, is for a gross debt-to-GDP to exceed 80% by end of the 2020/21 tax year. 

Those who watched the Budget Speech and have read the myriad news reports that followed could be excused for thinking that personal income tax payers are better off today than yesterday. We got off lightly with a mere 8% hike in sin taxes, a relatively small increase in fuel taxes and some money back thanks to favourable tweaks to the personal income tax margins. But there is a chilling comparison that you and I need to be aware of… We will be contributing more than twice what corporations pay in taxes in the coming tax year. Yes, you read that correctly, personal income tax payers will chip in R516bn compared to corporate income tax payers at a mere R213bn. The good news is that government seemed to hold off on implementing additional taxes on the country’s wealthy citizens, or at the very least they did not do so in an obvious way. This writer believes that the decision not to extend the section 12J tax incentive scheme is just one example of how government can sneakily collect more tax from the country’s high net worth citizens. 

A dangerous and unsustainable taxation tool

A wealth tax may be the fastest way to plug the holes in government finances, but it is dangerously unsustainable, according to Hannes Van den Berg, CEO of Momentum Consult. He explained that a wealth tax is levied on people whose net worth is above a certain threshold. And the rich are easy prey in a country with the highest published inequality in the world. A recent study by the World Inequality Lab suggested a range of taxes that could be levied on South Africans with a net worth over R3.8 million, suggesting that these taxes could raise up to R160 billion for government coffers. But does it make sense in a South African context?  Van den Berg thinks not, arguing that wealth tax is a short term tool to fix a long term problem. 

One of the issues facing National Treasury is that South Africans are already heavily taxed compared to their international peers, especially when one considers the mix of services that mid- to high-income families are forced to self-fund. We already face Capital Gains Tax, transfer duty, estate tax, donations tax and wide range of additional municipal taxes in the form of rates and surcharges on electricity and water and sanitation. Some use the Laffer Curve argument to keep the tax wolves at bay. The Laffer Curve was developed by supply-side economist Arthur Laffer to show that there is a point beyond which total tax revenue collections will fall despite raising tax rates. 

Others point out that the rich will simply relocate to friendlier tax dispensations. In fact, our prohibitively high levels of tax is fast becoming a major reason for people leaving the country. “The level of tax [in South Africa] is so high that people are either looking for other, often riskier, ways to mitigate their tax burden or they avoid paying tax altogether”, notes Van den Bergh. He points out that in a capitalist system, those willing to risk their capital for the country’s growth would reasonably expect some return. The bottom line is that neither tax avoidance nor emigration are helpful for economic growth. 

Celebrating a mediocre growth forecast

South Africa needs sustained economic growth at 3.5% per annum or higher if it hopes to bring its debt under control. In this context we were appalled by the minister’s apparent celebration of the forecast 3.2% rebound in economic growth for the country through 2022. This so-called rebound, plus the mediocre 1.9% in each of the ensuing two years, will not even be enough to return our economy to the level achieved in 2019. We need to emulate the likes of China and India, both of which are forecast to grow their GDP by close to 10% in the coming year. We have two more thoughts on the 2021 National Budget before retiring the topic for a year. 

The first centres on government’s continued obsession with welfare payments as a means to address inequality. South Africa has occupied the top slot on the world inequality rankings for more than a decade despite adding millions of names and allocating billions of rand to its welfare projects each year. This may not be a popular sentiment; but it is clear that the welfare system as currently designed does nothing to address inequality. Instead it creates a growing group of handout recipients who meet, and will continue to meet, the definition of poverty for decades to come. Consider for a moment what you might do with an extra R30 per month. That is how much extra South Africa’s old-age pensioners will receive next year. And child grant recipients can bag a stellar R14 per child. Meaningful jobs that pay a living wage will solve inequality and poverty provided that these jobs are created by the private sector and enabled by government rather than being created by government and funded by taxpayers. 

Corporate-tied economists need to grow a pair

Our second and final observation is that South Africa’s corporate-tied economists appear conflicted. A snapshot of five economists, posted on moneyweb.co.za, revealed a chasm between how corporate sector economists rated the minister versus independents. Three corporate economists gave the 2021 National Budget and average of 7.5 out of 10, while the two independents rated it at around 4.5 out of 10. It is long overdue that the country’s corporations grow a pair and start calling things as they see them. 

We were amazed that anyone could rate this 2021 National Budget at seven out of 10 or higher given the glossing over of crucial debt issues at State-owned Enterprises (SOEs) and the government’s agreement to continue with an obviously flawed process of negotiating three-year wage deals for a bloated and overpaid public sector.

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