Fiscal battle between extremes
Could Finance Minister Gordhan restore higher taxes on rich people and corporations? In an economy that last year produced R4.4 trillion worth of GDP, business taxes accounted for a paltry 4.5% of that, writes Patrick Bond
AFTER investigating the “massacre” (as termed by the DA and ANC Youth League) of more than 100 psychiatric patients deinstitutionalised from Life Esidimeni in order to save R200 a day on each, Health Ombudsman Malegapuru Makgoba advised that a “sufficient budget should be allocated for the implementation” of proper care.
But Finance Minister Pravin Gordhan had raised health care spending by only 5.6% last year and provincial hospital services faced a 2% cut (nearly R600 million). The health care inflation rate, according to medical aid schemes, was 11% and thus in real terms Gordhan slashed provinces by 13%, and cut 5.4% from the public health sector.
To judge such spending decisions, journalists rely on a small army of self-described “economists”, a profession whose familiarity with the economy was tested in 2008 and found wanting.
Chief economist at Pan African Investment & Research Iraj Abedian warned Gordhan’s predecessor Nhlanhla Nene on the front page of Business Day that social grants should be cut “way below inflation”, which Nene immediately did, while generously relaxing exchange controls on the rich.
Credit ratings agencies like Standard & Poor’s typically demand lower budget deficits (“fiscal improvement”), shrinking to 2.4% of the gross domestic product next year. Threatened with a potential downgrade to junk status, Gordhan cut the 2016 size of inflation-adjusted social grants and state budgets for housing, municipal services and even (amid a drought) water. The January 2016-17 inflation rate was 6.8% but a standard food basket for low-income families rose 16.5%, outstripping last year’s average 7.8% monthly increase (R25) in the child support grant (to R350) and the foster care grant’s measly 3.5% rise (to R890) – the payment of which is soon threatened by maladministration. This year leading tax lawyers and consultants are suggesting Gordhan raise VAT – more of which is paid by poor people in relation to their income. Business Day’s deputy editor Hilary Joffe argued last month that our 14% rate was low by international standards” and “you have to look at the whole fiscal package including the spending side, to see whether an increase in the VAT rate really would hurt the poor disproportionately. SA’s budget is already one of the world’s most redistributive, according to a World Bank study”.
The latter claim is sloppy fake news, for bank researchers refused to consider Pretoria’s crony-capitalist spending (for example infrastructure mega-projects) and the impact state bias has on indirect income and wealth. Each time I boarded an SAA plane last year, for example, taxpayers donated a R600 subsidy towards my ticket (R5.6 billion in subsidies for nine million passengers); when I boarded the Gautrain, there was another R90 gift (a R1.5bn subsidy covering 17 million trips). Meanwhile, operating subsidies of less than R5 a trip went to working-class Metrorail commuters (2.4 million a day). Minibus passengers got nothing.
Instead of raising VAT, could Gordhan restore higher taxes on rich people and corporations? The “1%” ultra-wealthy have done well since 1994, thanks to steady erosion of exchange controls, the resulting high interest rate and the stock market bubble (the world’s second largest measured as market capitalisation/GDP). The 1%’s share of national income was, thanks to apartheid, an impressive 12% in 1994. By 2008, this rose to 20%, the highest in a 2016 World Bank database.
Corporates should contribute more, for in an economy that last year produced R4.4 trillion worth of GDP (goods and services), business taxes accounted for a paltry R200bn (4.5% of GDP) of R1.2 trillion of state revenues. Income taxes provided R440bn followed by VAT at R300bn. Ten years ago, companies paid at a 7% rate of GDP and in 2008 the take from companies was 9% thanks to the commodity boom.
All along, the Treasury lowered corporate taxes: from 56% of distributed profits in 1994, to 43% in 1999, to 38% in 2005 and then down to 28% by 2013. Restoring taxes back to 7% of GDP would raise R110bn (five times as much as the 1% rise in VAT proposed by elites). By comparison, the #FeesMustFall-to-zero demand would cost R30bn annually, according to Treasury staff – about six times more than Gordhan added to last year’s budget after national protests.
Can firms afford higher taxes? Their rebuttal is that the current 28% rate (before loopholes) is higher than the world average – true, world rates have also dropped alarmingly. However, among peer emerging-market economies, the profitability of SA firms has usually been second or third highest, even during2015 when mining went belly-up. Even then, according to July’s International Monetary Fund review, Johannesburg corporations claimed a 23% return on equity.
One reason for such high profits is the prevalence of tsotsis in Sandton, akin to the wolves of Wall Street. Perhaps were they not employed by the same banks, the loudest economists might celebrate how currency-manipulation fines of 10% of annual turnover (for example Standard Bank potentially penalised R9.1bn) could be used to raise state social spending? Fines are surely also needed against persistent “illicit financial flows” by the likes of Lonmin, De Beers and MTN?
Instead, claim economists like Investec Wealth & Investment’s Brian Kantor, Gordhan “needs to recognise the cost savings were the private sector allowed to deliver more of the services that taxpayers fund.”
Kantor is silent on the obscene corporate overcharging on outsourced state contracts as revealed by Treasury’s former head of procurement Kenneth Brown.
In November, Brown suggested clawing back R233bn each year.
Then there are Treasury guarantees (R683bn) to undergird stateowned enterprise (SOE) borrowing, including Eskom’s R350bn exposure for the long-delayed Medupi and Kusile power plants which incorporate dubious coal-supply contracts with Oakbay (although thankfully Eskom’s desired borrowing for Russian nuclear plants is not yet included).
Other SOEs given these guarantees include the mismanaged SA National Roads Agency Ltd, SAA and Transnet.
The latter’s self-destructive expansion is based on the mining industry’s R803bn investment strategy to export “coal (18 billion tons), chromite (5.5 tons), platinum (6.3 tons) and palladium (3.6 tons)” through Richards Bay (planned during the Ramos-Molefe leadership era before coal’s 50% dollar-price crash since 2008, with no regard to climate change).
Another KZN white elephant is the R250bn expansion of Durban’s port-petrochemical complex, which the province’s Premier Willies Mchunu in November insisted would increase container traffic (mainly on dangerous trucks) from 2.5 to 20 million per annum by 2040, a planner’s fantasy.
These two delay-prone, carbon-intensive mega-projects are, respectively, the first two Presidential Infrastructure Co-ordinating Commission Strategic Integrated Projects promoted by the National Development Plan.
KZN’s herd of white elephants also includes the wasteful R6.4bn Durban 2022 Commonwealth Games.
In the battle between the forces of fiscal patronage (the Zuptas, especially parastatal managers) and fiscal prudence (Treasury neo-liberals), the latter have been extremist in imposing austerity – except when it comes to most dubious mega-projects.The budget offers an opportunity to embrace environmental sanity.
Bond is professor of political economy at the Wits School of Governance.