Alliance’s jump to the left
Relief misplaced given worrying recommendations
AFTER THE RELEASE of his mini-Budget on 21 October, Finance Minister Trevor Manuel told journalists that there would be no seismic shifts in Government’s economic policy. That comment implies the decisions reached at the tripartite alliance summit this month won’t become policy, as many of the recommendations can be described as seismic shifts to the left.
The alliance – the ANC, Cosatu and the SA Communist Party (SACP) – met on 17 and 18 October. They said in their declaration the focus of the summit was to “consolidate the economic policy perspectives that will inform our common election manifesto”.
Many private sector economists are relieved the summit declaration fails to come out against Budget surpluses and fails to set a target for a big Budget deficit. Similarly, there’s relief because the declaration fails to attack inflation targeting explicitly. That despite SACP general secretary Blade Nzimande talking in favour of a Budget deficit of 3% of gross domestic product and mentioning 9% as a more appropriate level of inflation than the current 6% upper limit of the target.
But the alliance declaration contains some recommendations that have serious implications for both the fiscus and the SA Reserve Bank. For the fiscus, there’s a recommendation for a basic income grant (BIG), which would be “linked to skills development”. The declaration doesn’t say how the link would be implemented but does say a number of its proposals on social protection require further discussion.
The proposal for a BIG isn’t new. What is new is that the ANC seems now to have endorsed it. Many analysts calculate implementing a BIG would put tremendous strain on SA’s fiscus. In 2002, Stellenbosch academic Servaas van der Berg found that a BIG of R100/month at the time would cost Government R54bn. A further R10,8bn would need to be added for administrative costs. To get some idea of the scale of the BIG in 2002 you need to set that R54bn cost against the Budget deficit of around R42bn projected for the next fiscal year.
Cosatu suggested in earlier debates that the BIG be financed through raising the income tax of the rich. Van der Berg found its suggestions implied the top marginal tax rate would have to be increased from 40% to 66%.
The alliance’s declaration also called for a flat benefit for unemployed workers whose Unemployment Insurance Fund has expired. Here, too, further discussion is required. No mention is made of how that benefit would be financed. The declaration similarly calls for a national pension scheme.
Two years ago, Manuel himself mooted the introduction of a mandatory State-run pension scheme. The idea was controversial and negotiations between labour, business and Government on the issue have stalled. There’s some disagreement over whether the investment of the mandatory pension contributions would be managed by the State or by private asset managers.
Significantly, Manuel’s proposal contained the suggestion of a wage subsidy, which at the time would cost R20bn and be financed by redistribution from wealthier employees to poorer workers who can’t afford the mandatory savings the State pension scheme requires.
There are other far-reaching proposals in the alliance declaration under the section entitled “Comprehensive social protection”. Fortunately, those are all up for further discussion.
SA’s fiscus will also be affected by the alliance’s suggestions about industrial policy, which the declaration regards as massively important for the future growth of SA’s economy. The declaration foresees “a major shift and up-scaling of industrial policy with significant additional resources, complemented by a more effective managerial and implementation capacity”.
Free marketeers dislike industrial policy because it implies Government bureaucrats are able to intervene effectively in the market through tax incentives and subsidies to steer specific industries to success. It’s true that many successful Asian economies used industrial policy, but the world is a changed place and many of the incentives they used are no longer allowed by the World Trade Organisation. It’s no secret Manuel isn’t a fan of industrial policy, as has been obvious from the paltry amounts he’s budgeted to support the policy in the past.
The alliance declaration says interest rates and exchange rates “need to be calibrated to take account of industrial policy imperatives. This will require, among others, a discussion on the mandate and practices of the Reserve Bank to include considerations of employment and economic growth in addition to the mandate on price stability”. That’s a highly controversial suggestion, as most private sector economists believe a dual mandate for the Bank will weaken the fight against inflation.
Wants a bigger budget deficit. Blade Nzimande