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20 March 2018 08:12 (South Africa)
Opinionista Luke Jordan

The new dawn’s first National Budget is the same old disaster

  • Luke Jordan
    Luke Jordan

    Luke Jordan is the CEO of Grassroot, a community organizing tech start-up he founded in 2015. He worked at the World Bank in India from 2011-14, and at McKinsey in China from 2005-10.

The first substantive action of the “new dawn” has arrived, and it could not be worse.

Almost R3-billion a year taken out of schools. When children cannot read. R10-billion taken out of homes. When the housing backlog is vast. R12-billion taken out of roads and rail and water, and R5-billion taken out of municipal infrastructure. When growth depends on infrastructure, especially in the rural areas hit hardest by the cuts, and when service delivery is perpetually behind. R3-billion out of building jails and courts. When those are overcrowded and crime is rampant.

The list goes on. R5-billion over three years removed from SARS’ IT investments. When efficient tax collection relies on IT, and eFiling is still built on a technology (Flash) that Apple and Google have called too insecure to use for cat videos. R&D infrastructure, slashed. Broadband, slashed. Even the small amounts are egregious. R100-million cut from libraries and museums. At the dawn of an era supposedly attacking corruption, the NPA’s budget is cut by R200-million a year, the equivalent of hundreds of lawyers and investigators.

But, it will be said, with money needed for universities, what else could be done? A great deal.

Start with inheritance taxes. The increase in the budget was from 20% to 25% on estates above R30-million. That resembles nothing so much as an aristocrat stepping from their carriage to slap the poor in the face. Instead, increase the rate to at least 50% above R5-million. Some will say that will increase evasion. Fine, then abolish the instrument of evasion–trusts. They serve no economic purpose aside from avoiding tax on the rich. Why do they still exist, while the poor are having schools and homes ripped from them?

Second, end the deduction of mortgage interest for landlords. At present, if you buy a second house on a mortgage and rent it out, you can deduct the interest from your taxes. This is a straightforward handout to the wealthy. I myself personally benefit from it. End it. Instead of reducing this subsidy to the rich, Treasury in the “new dawn” decided to disinvest in water and sanitation.

Third, increase taxes on dividends and individual capital gains. This is different to increasing corporate income tax because it does not touch retained profits or company capital gains, but gains by individuals on share sales and distributions. Pensions are already exempt from dividend tax, as are middle- and working-class savers through tax-free savings accounts. That exemption could be extended to any new foreign direct investment up to a threshold of a reasonable rate of return on the initial capital.

Most of all, introduce a second VAT band at a significantly higher rate, 20%, on luxury goods. Alongside that, make the small increases in ultra-luxury (iPad and perfume) excise taxes far steeper. The two central facts about South Africa’s economy are that it has the highest rates of inequality in the world and it is massively unbalanced towards consumption and away from investment. Little could be more efficient than a tax that targeted precisely the consumption of the rich.

Treasury used to argue this would be “too complex”. Since it is 2018 and we have computers Treasury may have realised that argument is now laughable (except if you’ve just cut the tax authority’s IT budget). Instead, the argument provided last week was that “upper-income households already bear 85% of the VAT burden”. This was somewhat extraordinary. One’s share of the VAT burden is mathematically equivalent to one’s share of non-food consumption. So Treasury was saying, “because the rich already consume 85% of everything that is not food in the country, we need to treat them with special kindness”.

So those are a set of measures that are precisely targeted to rich heirs, renters, landlords, and rich consumers. How much would they raise?

Conservatively, estimate that 10% of South Africa’s mortgages (R1.4-trillion) are for rental property, and you raise roughly R8-billion from eliminating the deduction. Twenty years ago, the Katz Commission suggested progressive inheritance tax could raise R10 billion a year. Again, be conservative, and estimate only half of that captured, or R5-billion. For VAT, assume half the consumption of upper income households is on luxury goods, or 40% of the VAT base. Increasing the VAT rate on that to 20% would raise twice as much as the 1% increase on the total. So, be conservative and restrict the increase to the top 20% of consumption, and that raises about R20-billion. Increasing dividend taxes to 30%, roughly the OECD average, would raise another R14-billion.

Added up, this comes to around R40-45-billion. A little above the amount cut from schools, roads, rail, water, libraries, jails, courts and prosecutors, with some left over to put into more aggressive private investment or job creation incentives.

Yes, the VAT increase could also have been avoided. But should not be. A 1% VAT increase is equal to a 0.8% increase in prices, barely the difference between inflation this year and two years ago, and unlike inflation it does not apply to food. Even without a luxury tax band, only 15% of the VAT increase will be borne by lower-income households. Have there been any protests about the VAT increase? How many protests are there by the poor about an absence of homes, schools, and services? Perhaps we should listen to what the poor are telling us about their priorities, instead of listening to their self-appointed spokespeople.

So the problem is not the VAT increase. The problem is that this budget slashed investment in the future, in the poor, in service delivery, and in prosecuting criminals, in order to tread gently on the consumption and inheritances of the rich.

One excuse for this is inevitably “waste and corruption”. Of course a great deal of that exists. But one struggles to understand how the logic is supposed to work. How is cutting new projects going to make corrupt and wasteful officials reduce the amount of corruption and waste on their existing projects, or even on the new ones they still oversee?

Is this supposed to be the scene: “Hello Mr Corrupt District Official, we are informing you that we have cut RX hundred million from your school building budget next year.” “Oh, well then I better stop being corrupt and use the remaining budget efficiently”. “Yes you better, because we’ve also cut the prosecutors’ budget”. The species of thinking represented by this argument falls somewhere between superstition and childishness.

Again, the alternative is not very difficult, with the tiniest bit of imagination. Increase the NPA budget by R500 million a year, for three years. Use the money to hire – under a new head of the NPA, of course -- a thousand new lawyers to go after provincial and local government corruption across the country. Then back load the “waste and corruption” cuts to 2019 and after. Give all those new investigators and lawyers a year to to put the fear of God into officials and contractors, and then wring out the waste. Still, don’t give that back to the rich. Put most of it into more houses, roads, schools, and jails, and imaginative private investment support.

So, to repeat the point: the first budget of the “new dawn” reduced investment in the poor to protect consumption by the rich in a consumption-heavy, highly unequal economy.

One other form of argument will be that somehow this will conjure investment from confidence fairies who are floating in the air. Ronald Reagan called this “voodoo”. The theory behind it has less predictive accuracy than Ptolemaic astronomy. In South Africa, we tried it before. It was called the 2000s. It resulted, in the words of the World Bank, “from being last (among our peers) in (investment to GDP) in the 1990s, to being second from last in the 2000s”.

All of our growth that decade was driven by public investment and consumer credit – the huge spike in borrowing for furniture and TVs and cars. Now, unlike the 2000s, consumer credit is maxed out as a source of growth. What the budget tells us is that the factions that ran the 2000s are back in power, and have not learned or changed at all. They still believe that they demonstrate their wisdom and virtue by defunding the future and hurting the poor to placate rain gods that only they know how to speak to, and who will shower us with storms any day now if we only grant them more power.

Remember that it was the low employment, low investment, high consumption, highly unequal growth of the 2000s that made so much of the country desperate enough that it fell for Zuma’s campaign. Know that it was not a Jacob Zuma type regime that preceded Hugo Chavez in Venezuela, but one that looked very much like this budget (if anything, less regressive). That sequence – fanatically orthodox self-styled reformers devoid of ideas, followed by charismatic men promising a solution to the suffering – cannot be repeated more than once or twice. That sequence breaks countries.

Finally, perhaps the only thing more depressing than this budget is the weakness of the opposition to it. The VAT increase will perhaps cost the poor R2-billion. The investment cuts will cost them over R30-billion. Given the choice between emphasizing the lost schools, jails, roads and toilets, and histrionics about a price rise with a ten times smaller impact, what did the opposition and civil society and the media choose? The latter, of course. Then too, the only counter proposal anyone seemed to have was raising corporate income tax (with one exception), demonstrating the bankruptcy of ideas and imagination on South Africa’s left.

Even worse, if one thing is certain it is that Malusi Gigaba personally did not write this Budget. If anyone did, it was Trevor Manuel, in spirit and oversight if not in deed. The ANC will easily deal with attacks against Gigaba by simply shuffling him. What then? The Budget is okay? The strategic ineptitude of prioritising personal attacks against Gigaba is hard to fathom. It shows that the opposition and civil society and media pundits are simply not fit for this new era. They survived because of Jacob Zuma, and should exit with him.

But they will not. A core feature of South African society is that once you have made it into the cliques you need, no amount of failure will dislodge you. Bungle the greatest opportunity in South African politics in 25 years, and don’t worry, you will still get your funding. We will have an opposition phalanx with a 20% party of the right and a 15% party of the left, continuing on their well-paid way, and the same old same old will keep our public debate in their deathly grip. Nothing will change, until the whole edifice collapses, whether through the professional looting of a David Mabuza or the structural breaking of a Hugo Chavez.

All of that in a single budget? Yes. Because budgets matter. Soap operas don’t. And this Budget tells us that the levers of real power are now firmly back in the hands of those whose fundamentalism in the 2000s brought us the last decade, and they have learned nothing. The reaction to it tells us that we have gone through everything to arrive at a politics and a public discourse that is if anything more closed, more shallow and less fit for purpose than it ever was. A society of which that is true is on borrowed time.

To the middle class, all that is left is to say is enjoy the stock market to come and the cheaper holidays in London. Just remember to save a little for the days when you look back wistfully at the gentle larceny of the Jacob Zuma years. DM

  • Luke Jordan
    Luke Jordan

    Luke Jordan is the CEO of Grassroot, a community organizing tech start-up he founded in 2015. He worked at the World Bank in India from 2011-14, and at McKinsey in China from 2005-10.

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