FIXING THE ECONOMY OP-ED
The Medium-Term Budget Policy Statement needs to break with our recent and current failed national fiscal strategy
This week, Finance Minister Enoch Godongwana will deliver his second Medium-Term Budget Policy Statement. His maiden speech in 2021, unfortunately, represented a continuation of Treasury’s regressive fiscal strategy of implementing budget cuts with the purported aim of stabilising the country’s debt-to-GDP ratio. This strategy has come at a cost, with disinvestment in healthcare and education, and increasing unemployment and poverty.
The 2022 Medium-Term Budget Policy Statement (MTBPS) should mark a radical departure from previous policy statements and make clear commitments towards restructuring the economy by aggressively investing in comprehensive social security, public services and social and economic infrastructure.
With the aim of encouraging structural transformation, South Africa’s fiscal strategy needs to be reorientated to stimulate aggregate demand while ensuring that domestic supply (increasing supply capacity rather than importing goods) is expanded. An increase in demand for local content, in particular, will support the expansion of markets for consumption and investment. This will not only tackle unemployment but will also grow the economy, and, as the GDP grows, so the debt-to-GDP ratio will come down.
The nature of South Africa’s structural unemployment requires an urgent intervention that will ensure that the government meets its constitutional obligation to provide social security while stimulating both the economy and supporting job creation. The current Social Relief of Distress (SRD) grant should be raised to at least the food poverty line of R624 to not only support those without income but also, as evidence increasingly shows, to stimulate the economy.
Finance Minister Enoch Godongwana. (Photo: Gallo Images / Jeffrey Abrahams)
The SRD grant has previously supported 10.5 million people and its legislative and budgetary infrastructure should be used as a stepping stone towards the introduction of a Universal Basic Income Guarantee. Given the structural nature of poverty and unemployment, the worsening cost-of-living crisis, and the consequent hunger faced by low-income households, Godongwana has no option but to take these steps.
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This necessary expansion of social security, however, should not come at the expense of the other existing social grants, and public services. Rather, social grants should play a complementary role to public services, and other interventions to support job creation. Public services are essential in improving the standard of living, the long-term development of human capital, and the economy. Budget cuts in education and healthcare exacerbate inequality and unemployment. They further worsen the burden of unpaid care work shouldered by black women and girls.
The MTBPS should commit to protecting public services by making allocations in line with population growth and ensuring that teachers and healthcare workers are recruited to address overcrowding in classrooms and improve the quality of healthcare services. The Presidential Employment Stimulus should be reinforced, providing much-needed work opportunities.
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The minister and National Treasury continue to use “limited fiscal space” and a “constrained fiscal context” as a justification for budget cuts. However, progressive taxation options and recent revenue windfalls have not been sufficiently utilised to support economic recovery. Instead, we have seen tax rebates for corporations and the wealthy. This is despite there being no evidence that cutting corporate income tax (CIT) supports economic growth. Instead, evidence shows, CIT cuts have increased inequality and have had no impact on economic growth. Therefore, the corporate tax rate cut, from 28% to 27%, in the 2022 Budget should be reversed.
Extend social support
The state has an obligation to raise the maximum available resources to support the progressive realisation of socioeconomic rights. This invariably includes domestic resource mobilisation and progressive taxation. By the time the MTBPS is delivered an estimated revenue overrun of R110-billion is expected. This overrun should be used towards extending social support and protecting households from the rising cost of living. In addition, the minister should also announce the government’s plan to introduce a wealth tax and luxury VAT, as some of the ways to redistribute income and finance inclusive development.
The Social Relief of Distress grant has previously supported 10.5 million people and its legislative and budgetary infrastructure should be used as a stepping stone towards the introduction of a Universal Basic Income Guarantee. (Photo: power987.co.za/Wikipedia)
The state must also support strategic public investment in infrastructure to extend social and economic infrastructure. This should be done in line with the expansion of the Expanded Public Works Programme to support employment in labour-intensive sectors such as manufacturing and construction, which both have contracted in the second quarter of 2022.
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The 2022 MTBPS must also urgently prioritise and support the Industrial Financing Programme (IFP) and the development and implementation of the various master plans. The IFP is integral to expanding local manufacturing and supporting the increase of exports. Yet, over the medium term, its allocation will decrease and this will negatively impact its mandate to support enterprises and expand employment. Without the necessary investments into industrial policy and master plans, South Africa’s deindustrialisation trend will continue, affecting long-term growth.
Collectively, these are some of key interventions needed to set us on a path of recovery, to protect households from the increased cost of living, and simultaneously support the medium- to the long-term structural transformation of the economy. Continuing on the same fiscal strategy that has compounded the crisis of unemployment, poverty and inequality would not only be foolhardy but will also be a violation of the state’s obligation to advance and protect socioeconomic rights. DM/MC
Zimbali Mncube is a Budget and Tax Justice Researcher with the Institute for Economic Justice. Vuyisiwe Mahafu is a Budget and Tax Justice Intern with the institute.
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This is becoming a bleat now. The article is peppered with in accuracies, for example the authors assert “This is despite there being no evidence that cutting corporate income tax (CIT) supports economic growth.”
What rubbish – the article they use as there foundation for this BS actually reads as follows: “While some studies, in particular OECD (2010), point to substantial and robust positive growth effects of corporate tax cuts … other studies report significantly negative, insignificant or at least mixed results.”
There is no credible example anywhere in the world where a non-performing / depressed / third world / emerging economy benefitted from a sustained and debt-laden social spending program. Au contraire, the history books are littered with examples of the opposite.
The problem with the article is that its authors are talking of expenditure side of the budget not the revenue side. Most of these people have never worked in a corporate world and are used to using other people’s money hence they think that money grows from trees. Their path to recovery is not investment, economic growth and job creation but a welfare state that must distribute the little income tax to the many fantasies they have. They make blaand statements without telling us about what modelling they have done and that points to economic plumbers. These clowns do not tell us about the projected revenue and expenditure as well as the deficit and how it will be financed. Neither do they seem to grasp what a MTBPS is all about and they simply want to pack everything as if it is the main budget.
They fail to grasp that for the state to have revenue you need both corporate and individual taxpayers and to have that you need investments into the economy by both local and foreign investors who do so not for charity but for returns on their investments. These investors do not owe South Africa any investments but will look at whether their investments are safe and would give them the return they want for their money. If they see that you have a lot of demands on their money they go somewhere else where they are valued and these clowns who live from donor funds would leave millions in poverty.