Dear friends and fellow South Africans,

PARLIAMENT'S ROLE IN THE CONTRACTION TRAP

 The country has once again gone through the ritual of receiving a new budget for the State from the hands of the Minister of Finance, and wondering what it means for the country as a whole.

Too often the perception prevails that what is good for the State is good for the country as a whole and that the budget of the State discloses a cornucopia of benefits which the State is to bestow on as many people within society as possible. Therefore, most of the debates surrounding the presentation of the State budget focus on whether enough has been made available to many of the State's programmes for the delivery of services.

Rarely is attention focused on the fact that, like everything else in life or in economics, the States budgetary allocations come at a cost to somebody or something else.

In reflecting on this cost, I do not wish to detract from the importance of the role that the State performs within our society. I just feel that there are enough politicians, commentators, analysts and pundits heralding the necessity of State interventions in our economy and society. I do not need to add my voice to that chorus. My role is that of balancing the debate and improving the understanding of those who are not experts on the subject, by bringing to the fore that which often remains unspoken.

The starting point remains the old and painful axiom that the State makes no money and produces no wealth of its own. Therefore, all the money it spends comes exclusively from those who create or have money or wealth, either by taking it directly from them in the form of direct or indirect taxation, or by taking it from them by borrowing that money from third, unrelated parties who will need to be paid back eventually by the same people who are being directly or indirectly taxed.

In the end, sooner or later, anything spent or borrowed by the Government needs to be paid or repaid by you and I, or our children, or our grandchildren, with no exception.

Some of the money we give to the State is a function of us creating wealth, which accounts for us paying income taxes. But often a great deal more is money which is taken from us after we have paid taxes on our income, or even if we produce no income, as is the case for the many indirect taxes we pay, ranging from VAT to fuel levies, electricity tariffs and the myriad other forms and occasions on which our daily life forces us to part from some of our money to give it to the State.

In this process, generally speaking, it is the State that decides how much of our money we can keep and how much we can part with. The corrective to this seemingly unfair reality is that we Members of Parliament, and therefore the representatives of the people, must approve with a law of our own not only the amount of money that the State takes from its citizens, but also the details of how the State will spend it. This should make it fair and satisfy all concerned.

Two issues, however, must be considered. At what point do we take from the citizenry so much money that we end up contracting the citizens' capability of producing more money, or maintaining their living standards? Otherwise put, at what point does the opportunity cost built into the use that citizens would make of the money they are forced to give to the Government begin eating into the Government's own pursuance of its intended social goals? Or, if one wants to put it in childlike terms, at what point does one start starving the goose that lays the golden eggs? In Parliament, we really don't know the answer.

At this time of unprecedented economic crisis, with the mounting recessions in Europe, with the prolonged economic downturn in the entire Western world, and with South Africa in a much worse economic position than Minister Pravin Gordhan wants us to believe, these considerations become very relevant. The new budget has not cut State spending, but has dramatically increased it.

In order to avoid increasing the deficit, which is the measure of what we keep borrowing every year and add on to a national debt which nobody knows whether, when and how it will ever be repaid, the Minister of Finance had to increase the amount of money he has chosen to take from the citizenry, and therefore is raising taxes and the overall fiscal burden on the citizen.

Otherwise put, because the economy is contracting, Minister Gordhan is taking more money out of it to be spent by the State. His justification is that the State will spend its money in such a good and wise way that it will produce an anti-cyclical effect, which means hoping that it will expand the economy and counter the cyclical contraction.

The problem is that we don't know whether the extra money taken out of our economy to be spent by the State will not cause a further contraction of the economy. In that case, the fiscal maneuver of the State would result in the so-called 'contraction trap', in which the State itself causes further contraction of our economy by virtue of the actions it takes in order to respond to previous contractions.

The further dilemma is that there is no evidence that the bulk of the money the State spends is actually aimed at creating an anti-cyclical effect and will promote viable economic growth. The Minister repeating that that is the case as many times as he does, does not necessarily make it so, and may indeed suggest that he is protesting too much and trying to convince us of something that is far from self-evident, even to him.

Per se, social programmes and redistribution of wealth do not necessarily affect economic growth, or the overall size of the economic pie.

The much-vaunted construction of infrastructure is mainly about keeping us at the level we are at, without sliding back. I will not comment on the growth value of the new proposals for economic development zones, because the details are yet to be fleshed out.

At this point, we can only wonder why the economic development zones to be placed in non-nodal and non-core areas would succeed in producing real and sustainable economic growth when ten years of experience of Industrial Development Zones placed in the most crucial economic infrastructure of our country have cost tax payers much more than they have created for our overall economy. One can only be extremely perplexed, but hopeful that some clarity to this dilemma will eventually be offered, possibly in economic terms and not with grand populist demagoguery.

Therefore, the issue of economic growth rests on what the Department of Trade and Industry does to stimulate manufacturing. This is Government funded economic growth, which means that its added value is created by the money taken from all of us as citizens and transferred to both domestic and foreign industrialists in consideration of their willingness to create job opportunities.

Greece had a great deal of such government funded growth and, when it was no longer sustainable and the State faced bankruptcy, Greece rapidly went from a 4.7% economic growth rate to almost minus 7%. Greece has taught us the need to differentiate between real economic growth and government funded economic growth.

Minister Rob Davis tries to shy away from this differentiation by postulating that Government assistance is merely an incubator of new industries which will then grow up into economic adulthood, no longer requiring the State to act as their sugar daddy through direct subsidies and a strong network of regulations, tariff and non-tariff trade barriers and restraint of competition which enable such industries to extract from all of us a much higher price for their goods and services than they otherwise could if the market were unregulated and open to foreign competition.

Yet we do not know which one is the correct metaphor; that of a child bound to grow into independence, or a delinquent teenager who gets addicted to subsidies and protections as one would to drugs, with no reason to ever give them up. World experience and common economic sense would make one inclined to opt for the latter.

The second of my grave concerns is that we, the representatives of the people, should be grappling with all these issues and finding the right solutions. Our efforts should embody one of the first constitutional democratic principles, entrenched for the first time in the Magna Carta; the principle of no taxation without representation.

Yet, in the past eighteen years, our democratic Parliament has done what the old Apartheid Parliament always did, namely pass the budget in exactly the same form, down to the last cent, as it was introduced by the Minister of Finance. This has not changed, even after Parliament finally gave itself the power to change the budget introduced by the Minister in any way it wishes. It is quite an unlikely outcome that Parliament and the Minister would have exactly the same mind on all issues and budgetary allocations, and this outcome should be almost impossible in times of crisis and uncertainty, like the present.

It might be more likely that Parliament just does not have the capacity, aptitude or inclination to seriously apply its mind to these issues. If it did, the Parliamentary Budget Office would have long been established and all the petty excuses which have thus far delayed it set aside.

Perhaps, like during the time of Apartheid, Parliamentarians may just like the easier job and lesser workload of debating a budget rather than redrafting it. If we consider how the so-called budget debates deal with general issues of policy, abstractions and often irrelevancies, rather than actual economic discussions, analysis of budgetary allocations and cost-benefit analysis between what the State spends and what the citizens could do with that money, one may be inclined to believe that such is indeed the case.

One would hope that this time around Parliament may rise to a higher standard of performance and do more of that which the citizenry rightly expects of it.

Yours in the service of our nation,

Prince Mangosuthu Buthelezi MP

Issued by the IFP, February 25 2012

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