Gordhan should not raise taxes

2017-02-20 16:16

Pravin Gordhan is back with his budget speech this week. He comes back at a critical time in South Africa – unemployment remains stubbornly high and prices keep rising.  Questions arise ahead of this very important budget speech. Will the minister raise taxes?  Will he cut spending? Will his budget revitalize economic growth and lessen the deficit that has lasted for years?

These are all very important questions. Given the economic pressures the country endures; expectations are high; rightly so.

What I’ll be expecting from Mr. Gordhan’s speech, is the recognition of the importance of economic growth as an engine of job creation and alleviation of poverty. I hope his budget will focus on the devices needed to revitalize South Africa’s disappointing levels of economic growth.

In revitalizing economic growth, the minister should stay away from raising taxes this year.

A rise in taxes will mean you and I will be left with less money to spend, as government spends our tax rands on its inefficient costly programmes. Because we will be spending less and saving less, productivity and the already low-growth economy will further slowdown –  which is something we really can’t afford at the moment.

We already pay a lot in taxes. In 2015, individual income tax rose by 1% to 41%; fuel levies and other forms of taxes went up over the past two years as well; and now there are proposals for sugar tax. When we buy clothing, or order a meal at the restaurant, or buy furniture, we are taxed. This is painful.

The disheartening thing about these massive taxes we pay is that the return on investment is dismal. Politicians loot the money, or waste it on their inefficient programmes that aren’t really worth as much billions.

What Mr. Gordhan needs to look into, rather, to revitalize economic growth, is significant cuts on government spending. South Africa’s government spending, accompanied by the rising debt that has surpassed 50% of gross domestic product (GDP), is getting out of control.

The way our government spends you’d sure think the money drops from the sky. With persistent calls for free higher education and the National Health Insurance (NHI) on its way, politicians’ higher propensity to spend will not be abating anytime soon.

These programs will be expensive, and will certainly result in further rise in taxes – which will worsen the damage.

Brian Kantor, a chief economist and strategist at Investec Wealth & Investment, penned a scintillating piece published on Business Day last week.

In it, he said “The way forward is for the government to spend less, especially on the benefits provided to the nannies employed by an increasingly nanny state, who thrive on an ever-growing but largely dispensable tide of regulation that inhibits production and employment.”

He further made a brilliant point – that “government also needs to recognise the cost savings, were the private sector allowed to deliver more of the services that taxpayers fund, including education and hospital services as well as electricity and transport.”

Brian was absolutely correct, President Zuma and Gordhan need to look into finding ways to cut government costs. Encouraging growth of independent schools and introducing voucher systems in healthcare and other programs, would make a big difference and strengthen consumer choice. It would help reduce government costs and revitalize the private sector.

But I’m despondent on this front. In his State of the Nation Address (SONA), President Zuma never said anything about the revitalization of the private sector and entrepreneurship in South Africa. Anything. Can you believe it?

Of course we cannot expect structural reforms from Mr. Gordhan’s speech this week; but the announcement of spending cuts would be a great start in the right direction by South Africa’s government.

Economic growth is key to rapid job creation; and statistical data across South Africa’s post-1994 history supports this view. High taxes and massive government spending do not bolster growth, they stifle it. Low taxes and less government spending, bolster economic growth.

We are in an unfortunate and unpleasant situation. Mr. Gordhan needs to make tough decisions to revitalize this economy, and some of the decisions will be unpopular.

Will he be brave enough to make unpopular decisions and cut the spending that represses economic growth? We'll have to wait and see.

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