‘A paradigm shift’ is critical for achieving economic inclusiveness

SOME may remember former finance minister Pravin Gordhan’s Budget speech in 2017 when he said:

“These South African realities are known to all of us: income growth has been uneven – the bottom 20% have benefited from social grants and better access to services, the top 20% have benefited from the rising demand for skills and pay increases. Those in the middle have been left behind. Wealth remains highly concentrated: 95% of wealth is in the hands of 10% of the population; 35% of the labour force are unemployed or have given up hope of finding work . .... ”.

Gordhan’s Budget was meant to reduce inequality in South Africa to levels that reflect “a better quality of life for all”.

This is the historical context in which Finance Minister Enoch Godongwana will this year present yet another Budget. If he is to reduce inequality, what should he do?

At its most basic level, the problem is one of fashioning an inclusive and shared economy that allows for skills and economic benefits to flow to all without exception.

Current economic trends are pointing towards higher levels of inequality and concentration of wealth than in 2017. This is especially so since Covid-19 which led to shrinkage of the economy by 7.5% for the year 2021. During the same time unemployment rose by more than 7 percentage points from 26%. This leads one to think the current economic policy is failing South Africans.

There is a need for a paradigm shift in South Africa to achieve economic inclusiveness. By definition, such a transformation requires similarly inclusive participatory planning and budgeting processes, a far cry from current practice. There are two strategies to achieve this.

First, Gordhan’s missing middle 60% that has no share in skills (knowledge) and economic benefits (returns to labour or capital) must be steadily reduced and eliminated.

Second, the lowest 20% that, according to Gordhan in 2017, depended on social grants must be reduced to negligible levels in economic terms. Conventional elements of budgeting include tax rates and incentives, public spending, public investment, interest rates, inflation, and exchange rates. Of these, the government has direct control over the first three.

It would be desirable to reduce the tax burden on the workers and increase taxes of both income and wealth taxes for the top 20%. The tax regime for workers should facilitate transition to a knowledge economy. There is no need to increase VAT beyond 15% but more to reduce it and increase the range of non-VAT rated goods that the working class depends on. By now South Africa should be having a tax incentive regime targeted at promoting investment in townships and the former homelands.

Subsequent to these tax reforms, public spending and investment should be similarly adjusted. The minister should allocate a percentage of mandatory public spending on businesses that benefit from the tax incentives. This should be announced as an item in the Budget.

The government is a major driver of investment decisions that affect the distribution of skills or knowledge and economic benefits. It does this through investments in education, training, and research and development. This has a direct effect in reducing inequality and eliminating Gordhan’s “missing middle 60%”. These are people who are excluded from the knowledge economy and enjoy no benefits from returns in economic investments.

Until now, it would appear a majority of public research bodies have no significant physical presence in the townships or the rural hinterlands. If this is the case, it means their activities at present are part of the forces that accentuate inequalities in income, wealth, and knowledge. Even a partial change in their orientation can positively affect local knowledge economies in townships and former homelands.

It is desirable for the minister to consider ring-fencing a percentage of the Budget allocation for public research, education and training, including higher education, to be conditional on expected impact in townships and the former homelands. I would recommend that no less than 25% of their allocation each year be set aside to accelerate localisation of knowledge economies.

These proposals assume institutionalised participatory budgeting to mobilise “wisdom of the crowds”. Of interest to the minister is the rate at which we can expect to erode present inequality to achieve an inclusive knowledge economy.

If in 2017 we had 80% of the population effectively inactive economically (enjoying neither knowledge nor returns), how fast can this be changed by the measures suggested here? An appropriate per capita threshold (minimum viable) investment level can be worked out by a process of learning-by-doing to produce desired results.

Minister Godongwana is well advised to set his sights on an economic strategy to develop core capabilities to institutionalise improvements in innovation, productivity, quality, and sustainable development within a circular economy framework for material inputs. This is already implied but not stated explicitly in the District Development Model (DDM) which President Cyril Ramaphosa launched in 2019. The DDM aims to devolve government in South Africa to the eight metros and 44 district municipalities to localise economic development.

Developmental local government has up to now been hamstrung by economic regulation which has also played a role in intensifying concentration of wealth and income to the top 20%.

To conclude, the minister will do well to allocate a Budget to the DDM over and above that usually earmarked for municipalities. An initial figure of 10% with an annual escalation tied to performance is not an unreasonable proposal.