ANC Can't See Hard Facts Hitting South Africa

SA has been shaken out of its government of national unity (GNU) torpor by a sudden convergence of quakes. The budget deadlock was swiftly followed by a short but intense spell of load-shedding. These strong domestic tremors were amplified by the dramatic deterioration of relations with the US.

SA has stood astride major fault lines for more than a decade. These are now worsening rapidly, yet it struggles to find the urgency to implement the reforms that were already urgent a decade ago and are now a matter of national survival. Economic growth remains far below the 2% minimum needed to prevent unemployment from rising further. GDP per capita is stagnant, and SA will soon downgrade from middle to lower-middle income. Unemployment is a stubbornly high 30% and rising. Investment remains directed towards capacity replacement, not growth.

Fiscal consolidation will have to start in the next two years once growth has returned. Every budget speech says so, and every year nearly each key target — revenues, expenditures, investment and thus budget deficit and national debt — is missed.

The cumulative quantum of lost revenues, overexpenditure, underinvestment and total debt is immense compared with where SA was a decade ago and what has been promised ad nauseam.

Fixing the patently failed state-owned enterprises (SOEs) is imperative. But that will not create new sources of growth. It will allow people only to power their homes and businesses, drink water, if they’re lucky, and get from point A to point B at great cost. Mere stabilisation in a compound crisis means relative decline. The labour market illustrates this perfectly: while the economy is forecast to create only 115,000 jobs in 2025, the labour force is expected to grow by 340,000, pushing unemployment from 32.7% to 33.2%. 

Post-Mbeki economics

Since 2007 the ANC has either chosen the wrong strategy or failed to implement a better one with full force. The rift between policy and reality remains immense. This was put under a blinding spotlight when it was reported that the Treasury is considering a wealth tax to make up for the VAT increase forgone in this year’s budget fiasco.

A wealth tax, of all things! And now, of all times!

In our extremely tough economic environment, the government has precious few levers to avoid a technical recession: raise taxes, borrow more or cut expenditure. The choice of a VAT increase under the nose of the GNU partners confirmed that the ANC treats its governing partners as a second-class cohort expected at best to rubber stamp its decisions and at worst to simply watch as old bills are signed into new laws. 

It also confirmed that the ANC remains wedded to taxing more, to spend more. This has been its software since Thabo Mbeki was unceremoniously ousted. It bears restating that his insistence on fiscal responsibility earned him the hatred of both left and right factions of the ANC. The disastrous socioeconomic project that resulted demanded a structural budget deficit funded by tax increases and borrowing, and by 2015 the country was in structural economic depletion, nonconsumption-related activities being fast destroyed. By 2019, it was in structural consumption collapse — savings were being depleted and consumer debt was at its limit. Growth unsurprisingly vanished.

The pandemic further opened the tap of consumption subsidisation in a consumption-driven, but exhausted, economy. In extremely tough circumstances the government had little choice but to borrow. That is not supposed to last. Pandemic-era subsidies are still in place. The National Health Insurance is law. Government spending remains almost entirely geared towards the welfare state and paying for its own operating costs, as well as debt repayments.

No business would survive such mismanagement, but states do not go out of business — they fail. And the SA developmental state has failed.

Investment accounts for a meagre 5% of GDP. Production throughout the SOEs ranges from stagnant to gone. The prices consumers pay for these scarce goods and services have increased multiple times. At the same time, what remains of industrial policy is actively contributing to deindustrialisation: all manners of subsidies and protection for innately uncompetitive but ANC-beloved industries, public and private, and endlessly creative obstructions and red-tape erected as if to kill private sector investment and activity.

Which leads us back to the wealth tax. SA ranks among the most heavily taxed countries. It is also one of the most unequally taxed, with a minute set of individual and corporate taxpayers bearing virtually all the income and profit tax burden. If the VAT increase is an attack on the poor, a wealth tax is an indirect attack on the tax base.

Wealth taxes not only fail on their income goal but also chase taxpayers away. We live in a world in which good taxpayers are worth a premium, with the richest ones spoilt for golden visa options.

In SA’s case it is difficult to overstate how breathtakingly out of step, tone-deaf and counterproductive a wealth tax is. Directly, it would lead to an inescapable decrease in personal income tax revenues, and indirectly, it would reduce duties, VAT and corporate income tax earnings. Triggering the decline of one will precipitate that of the others, because economic activity, from investment to production to consumption, is highly concentrated. Those who earn the most are those who invest and consume the most. Household spending accounts for more than 60% of GDP, and any policy that drives away high-income earners directly threatens this critical economic component.

This is not an ideological position. As a social-democrat leaning leftward on social policy and rightward on economic policy, I view progressive assets, income and profit tax as fundamental to fiscal stability and the social compact. But context matters. As do outcomes. And as far as outcomes go, the taxation-debt-public expenditure lever has been an astounding failure since circa 2010.

Indeed, in a stunning inversion of what happened between 1994 and 2007, SA’s much-touted expenditure multiplier has been a major drag. When assessing the growth yield of taxation, debt and public expenditure against others, SA has ranked at the bottom near Brazil and Greece, and far from world leaders such as China and Malaysia. An antidevelopmental state, in fact.

Now or never

The hard truth is the ANC is dead set against the real reforms that would send the antidevelopmental state to the rubbish heap. Reform should prioritise major cuts to the government’s operating costs. Instead, public expenditure should be directed towards the welfare state and key infrastructure. The first is a vital guardrail against social upheaval. The second should take place only if it is against the public interest that the private sector provide such infrastructure.

There are few such cases in which a strong antitrust framework exists. Wherever possible, the private sector should be freed from the idiotic, employment, growth and tax-destroying policy complex that passes as the national development strategy. The economy should be allowed to grow where it will naturally grow: agriculture, mining, tourism, some labour-intensive manufacturing, and potentially large labour-intensive export services.

Capital-intensive manufacturing — as reminded by the abject failure of the steel sector, and as highlighted by the real possibility that the automotive sector will not survive the end of SA’s access to African Growth & Opportunity Act benefits — is going, and will remain gone.

If the ANC cannot see the truth of hard facts as they hit SA, it never will. Its GNU partners will do well to remember that sticking with a doomed strategy serves the interests only of those who brought state capture to the country, and who want to bring it back.