UK splurges while SA purges spending
Aweek after finance minister Tito Mboweni unveiled his budget, his UK counterpart, one of the heirs of Margaret Thatcher, did the same.
It was interesting to observe how different were the headlines they generated, perhaps not in the way one would have expected.
One of the standout measures from Mboweni was an intention to cut corporate taxes from the 2022/2023 financial year, having in the meantime committed to slashing spending, including a wage freeze for public servants and a below-inflation increase for grant recipients.
The budget was also notable for its lack of new taxes on SA’s middle classes, largely in recognition of the small tax base and its ability to take more pain after Covid-19 and associated lockdowns battered the economy and incomes.
In his budget, Rishi Sunak, the Tory chancellor of the exchequer, unveiled plans to increase UK corporate taxes to the highest levels in about half a century, when a “socialist”
Labour government was in office.
Having worked in the UK during the financial crisis that helped to usher in a Conservative-led coalition government in 2010, I thought the contrast between Sunak and one of his more recent predecessors, George Osborne, was striking.
At that time the idea of raising taxes, at least on the well-off who vote for the Conservative Party, was a swear word, whereas the poor and public-sector workers, including members of the National Health Service, who are applauded as heroes today, were fair game.
Osborne was all about cutting corporate taxes and brutal austerity, including penalising parents who had more than two children and taking money from social housing recipients who had spare bedrooms through cuts in their benefits. From about 28% when the Tories came to power in 2010, the UK corporate tax rate now stands at 19%. Just before he was booted out after the Brexit vote, Osborne had pledged to get it to 15%, raising concern that the UK would seek to compete with the EU by becoming a Singapore-type economy with low taxes and lax regulation on its doorstep.
Sunak has torn up that script and wants to get the corporate tax up to 25% in 2023, still lower than the 27% proposed by Mboweni, and announced other tax measures that will bring more than a million people into the net, while pushing many into higher brackets.
The Financial Times’s chief economics commentator, Martin Wolf, pointed out this week that Osborne’s corporate tax cuts failed to boost investment, something that he, citing another economist, attributed to the country’s bonus culture.
That culture, he argued, encourages executives to use corporate profits to boost their share price — and their own pay — rather than investment.
Mariana Mazzucato, the University College London economics professor who sits on President Cyril Ramaphosa ’ s Economic Advisory Council, has made a similar argument in explaining corporations’ failure to invest in research & development, as part of a wider advocacy for a more entrepreneurial or activist state.
While the apparent contradiction of an ANC finance minister embarking on what leftist critics would refer to as an austerity budget targeting the poor, while an heir of Thatcher does the opposite — spending now and hitting corporates and middle classes with tax increases later — makes interesting reading, it’s also misleading.
Given the trend in government spending in SA over the past decade, when debt as a percentage of GDP had risen from about 25% and is now racing towards 100%, despite the cuts announced in February, it’s hard to argue that the country is in an age of austerity. Some have argued that, if anything, the spending reductions don’t go far enough, and with the GDP growth assumptions it’s based on seen to be on the optimistic side, the government’s debt consolidation plans lack credibility.
The aggressive tax-raising measures in the UK are also interesting in what they say about what was assumed to be a new age of “magic money”, as the Reserve Bank governor put it in a speech in June 2020. Then, SA’s central bank came under huge attack for not printing money, while the government’s fiscal response was seen to be inadequate, despite its disputed claim to be providing R500bn of relief, equivalent to about 10% of GDP.
There’s no disputing that, aided by historically low interest rates and a central bank able to print money without worrying about debasing its currency, the UK was among the most aggressive countries in responding to the virus. That saw borrowing jump to the highest since World War 2 and its debt-to-GDP is now approaching 100%. Its support to the economy, including a furlough scheme that’s been extended to September 2021 and cheap loans for companies, was equivalent to about 16% of GDP, on the higher end even for rich countries.
Much of the criticism levelled at Mboweni in 2020 seemed to be premised on the idea that SA could imitate what was being done in the UK and elsewhere. The minister and the central bank governor were seen to be overly conservative as none of the money had to be paid back. It was a bit baffling that presented with a cost-free and easy solution to solve all our Covid-related economic problems, they chose the more difficult path, with the political attacks they had to endure.
Watching the party of Thatcher discard what was assumed to be one of its core foundations, an aversion to taxing companies and the well off, was a timely reminder that there’s no free money and that eventually it has to be paid back.
SA’S CENTRAL BANK CAME UNDER ATTACK FOR NOT PRINTING MONEY, WHILE THE STATE’S FISCAL RESPONSE WAS SEEN TO BE INADEQUATE