In Pravin Gordhan's Medium Term Financial Statement (MTFS) the key message was that South Africa's savings ratio, at 16.1%, is far too low, and that meanwhile government expenditure has been favouring consumption. The result is a dramatically reduced rate of capital formation. If one looks back at the apartheid years one finds a savings ratio typically of 20%-25% and the state's capital investment accounting for a full half of total capital formation. Under ANC government that figure has fallen to a third and then to a quarter.
The reasons for this are various. First, the ANC has invented an enormous new form of consumption expenditure in social grants, currently costing R89 billion a year. Given the poor shape of the economy in 2009 many thought that the government could not possibly honour the Polokwane promise of child support grants being increased both in amounts and in coverage, yet this is exactly what happened in 2010 with 15-16 year olds included and by 2012 17-18 year olds will be added too.
Second, much of the provincial and municipal budgets for capital spending goes unspent: the emphasis there too is on sky-high salaries for as many public servants as possible. Third, the number of public sector workers has continued steadily to increase and year after year they have received massive inflation-plus increases so the public sector wage bill has been increasing at a truly prodigious rate. The same is true in the parastatals, many of which are far behind with their capital spending programmes but where salaries are often prodigious.
Government itself is a major culprit. Zuma's expansion of the cabinet was extremely costly and the expenses of the Presidency itself keep zooming up. Almost without exception Ministers are spendthrifts, spending vastly on luxury cars, luxury hotels, foreign travel, advertising which features the Minister's face, bodyguards, motorcycle escorts and so on.
Enormous sums have been spent on entertainment, on buying World Cup tickets and the like and the state auditors put the overall scale of wastage in the many billions. Inevitably, Ministerial excess becomes a model for provincial MECs and even for mayors and councillors. I have a friend who runs a South Coast hotel which only keeps afloat due to the prodigious expenditure of local councillors on conferences, workshops and the like - and even the lowliest little council now features, for example, a full-time Speaker, replete with mace and a full-time salary.
Even the DA is not immune to this sort of nonsense: Patricia de Lille travels abroad far more than Cape Town mayors ever used to do. An enormous amount more leaks, of course, into corruption - many tens of billions a year - and almost all of this is consumption expenditure too. Very few crooks use their ill-gotten gains to build factories or even offices.
Trevor Manuel has since backed up Gordhan's message, lamenting the general obsession with bling, with hyper-luxury weddings and even funerals, and generally with "keeping up with the Kunenes". He talks sadly of how South Africans have never been much good at saving and how many of them only afford their present lifestyles by going deep into debt. In fact, his phrase about "keeping up with the Kunenes" is more to the point since an examination of the figures shows that a good part of the problem lies with the burgeoning new middle class which, unlike the old one, saves virtually nothing.
The tabloid press endlessly celebrates new ANC millionaires who give vulgar displays of every kind. To be frank, Jo'burg bling was always pretty tasteless and over-the-top but the newcomers often seem determined to set new records in this regard. Each new set of nouveaux riches seem more vulgar than the last.
Now, it is bad enough that we haven't invested enough in new power stations or railways to carry our exports to our ports. The result has been a huge economic blight affecting virtually all industries. But the more important point is that this situation makes a complete mockery of the New Growth Path and all who believe in the Developmental State.
Far from the state leading economic development, it is shrinking ever more from the task and this is happening on the watch of all those who voted for the opposite at Polokwane. Moreover, one notes that the far Left in Cabinet consists of Rob Davies, Ebrahim Patel and Tina Joemat-Pettersson. Theoretically, these three are the most committed to the Developmental State - and yet Ms Joemat-Pettersson has recently hit the headlines for spending millions of Rands on luxury hotels.
Yet when Mr Gordhan announced that as a first step towards diverting funds away from consumption he would try to cap public sector pay with a 5% per annum increase for the next three years, there were bitter cries of treachery from Zwelinzima Vavi. Yet Gordhan is merely suggesting that pay should be indexed to inflation and has suggested no limit on the increase in public sector jobs. That is, in itself, absurdly mild. But the real point is, does Vavi believe in the developmental state or not? If he wants state investment to increase what would he like to cut to make room for it?
But there are two other points of great significance. First, between 2006 and 2009 the number of income and corporate tax payers fell by 422,000 - undoubtedly due to continuing white emigration and, one fears, a general reluctance on the part of the new elite to become taxpayers at all. Whatever the reasons, this 10% shrinkage of the tax base is deeply serious.
Moreover, the top six tax brackets contributed 39% of the total tax take in 2006 but by 2009 they accounted for 55%. That is to say, South Africa's huge splurge on consumption investment of every kind is dependent upon a fast-shrinking tax base, with a very small number of rich companies and individuals contributing the bulk. More or less by definition, these are also the most mobile elements within the population, able to quit on a moment's notice. This is already a precarious balancing act.
But there is an elephant in the room: the NHI. At just the point that Gordhan and Manuel have realised the urgent necessity of diverting expenditure away from consumption, the ANC has come up with a new mega-consumption project, due soon, we are told, to be taking up to R320 billion a year. One can only imagine the horror with which Gordhan regards this new pachyderm - no wonder it made no appearance in his MTBPS.
South Africans are already heavily taxed and one may be sure that to impose these vast new costs on our shrinking tax base will merely drive more of that base off-shore. As that happens, all manner of public projects will become unaffordable. Messrs Patel and Davies will realise with horror that the only way to have a developmental state will be either to increase VAT or to cut welfare payments.
But of course, the real test will come as the Finance Ministry (which is well aware of all these trends) faces up to NHI. One suspects that NHI will be the bridge too far. If government perseveres with it, the tax base will shrink faster and all manner of other options - including the Developmental State - will simply disappear.
For, whatever happens, what is quite clear is that our current trajectory is quite unsustainable. We absolutely cannot go on adding more and more big consumption projects to be funded by a fast-shrinking tax base, particularly since such projects are dependent on a tiny number of highly mobile taxpayers who can easily move themselves and their businesses offshore.
We have probably already reached the tipping point where, say, a 10% increase in taxation would actually see a reduction in tax receipts as more and more taxpayers remove themselves from the taxman's reach. One should not forget that the white age pyramid is heavily weighted towards the older age groups. It is perfectly easy for them, as they retire, to move their wealth offshore, to move to retirement villages in Mauritius or the Seychelles or make other perfectly legal tax-avoidance steps.
Where all this leaves one, of course, is with an ever-increasing dependence on FDI as a source of capital formation. And there's a problem there too. Not only will it mean that Patel and Davies have to learn to cheer Walmart on but that future foreign investors will be able to become increasingly picky. We won't invest unless you give us binding commitments against future nationalisation. And, by the way, you have to liberalise your labour laws. And by the way we can't be bothered with BEE or affirmative action.....And so on.
This is where we are heading. Despite all the heady ideological talk, the truth is much simpler and more vulgar which is that for the last decade and more the ANC has been holding a great big party, with vastly increased consumption on every hand. This period is now almost over, though Zuma and his cronies will be the last to realise it.
Naturally, this mega-consumption has been bad for growth and employment, as well as being culturally and morally dreadful. It is highly unlikely that anyone is going to listen to Manuel and Gordhan. And the price for that will be seen both in the virtual impossibility of NHI and an ever-increasing dependency on the whims of foreign investors.
RW Johnson
This article was published with the assistance of the Friedrich-Naumann-Stiftung für die Freiheit (FNF). The views presented in the article are those of the author and do not necessarily represent the views of FNF.
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