The following is an edited press statement I delivered on 29 October at the launch of the Free Market Foundation’s “Liberty First: Size of Government” report.
Cutting spending, providing tax relief, and privatising the greatest burdens on the state’s balance sheet, must feature high on any credible “reform” agenda that the so-called Government of National Unity (GNU) might be pursuing. In their absence, the heavy weight that is the state will continue to drag down South Africa’s socio-economy.
The bigger the government, the more resources it feels compelled to extract from the productive sector of society. And, inevitably, the bigger the government, the more it does – meaning society and commerce can do less. This translates into less economic freedom.
The Free Market Foundation (FMF) launched its second Liberty First report this week on the topic of “Size of Government”. This came a day before finance minister Enoch Godongwana’s 2024 medium-term budget policy statement.
The report is divided into three categories of reform proposals: Fiscal Responsibility (how government spends our money), Tax Reform (how government receives our money), and Privatisation (the division of labour between the private sector and government).
Godongwana’s mini-budget turned out to be nothing new – it was by no means a “GNU budget” but a continuation of the Ramaphosa administration’s ANC good vibes era.
Human development and economic freedom
There is a clear and unmistakable correlation between indicators of human development and higher levels of economic freedom. Economic freedom, of course, means a freer market economy whereby consumers and producers, rather than the government, decide how to go about their economic affairs.
The most noteworthy fact is that in countries with higher levels of economic freedom, or the most “capitalist” states in the world, the poorest 10% of the population earn about eight times more than the poorest 10% of the population in those countries with the least economic freedom, or those most “interventionist” states in the world.
This translates into the poorest of the poor earning R250,000 per year on average in the free market economies of the world, and the poorest of the poor earning only R30,500 per year on average in those countries where governments interfere more.
But don’t ask me.
Ask the millions of people who flee Zimbabwe, which sits at the very bottom alongside Venezuela, of the Fraser Institute’s Economic Freedom of the World rankings.
Zimbabweans flee into South Africa, and nobody from South Africa flees into Zimbabwe, just like the people of Venezuela flee into more economically free states rather than people fleeing out of those states into Venezuela.
The poor understand that things are better for them in free market economies, and we should listen to the poor for a change.
Mini-budget
Minister Godongwana’s medium-term budget policy statement was one of the last “easy” moments for the GNU to announce a reform agenda. It has already been over 100 days since the GNU was formed and South Africans are now starting to form expectations around the policy environment.
Thus far, we are being led to believe that there will be no policy reform, only better implementation of existing, usually bad policy. And Godongwana’s indication that government will carry on with more of the same – which the February 2025 budget will no doubt repeat – is unfortunate in this respect.
The FMF’s practical reform proposals would allow South Africa to climb the economic freedom rankings and therefore produce better socio-economic outcomes.
Fiscal responsibility
As a matter of fiscal responsibility, we are quite aware that the GNU was born in sin. President Ramaphosa radically enlarged his already large Cabinet on the nonsensical premise that it was necessary to accommodate coalition partners.
Instead, the FMF has proposed in the past – and continues to propose – that South Africa’s unwieldy Cabinet be reduced from its current size of the President, Deputy President, and 32 ministers and 43 deputy ministers, to only 10 portfolios. This would comprise the President and nine ministers, each being entitled to only one deputy. Implementing this reform would be constitutionally compliant, and would cover all the necessary aspects of government action in South Africa.
This would set a very important principle and precedent that must then trickle down into the civil service. South Africa has some 1.3 million state employees, of which 55,000 earn more than R1 million per year.
According to research by Dr Morne Malan, some 18.6% of working South Africans are employed by the state. We spend 13.6% of our GDP on state salaries. Compare this to Norway, where 30% of the population, much higher than South Africa, works for the state, but they only spend 11% of their GDP on state salaries.
The problem here, of course, is return on investment. Norway’s civil service is proportionally larger than ours, is paid proportionally less than ours, but delivers far greater value for their society than ours does.
To say that we must spend time and effort on upskilling and de-corrupting our civil service is, unfortunately, a fantasy right now. We cannot expect the taxpayer to continue forking out money for the insult that is South Africa’s public administration.
As such, the FMF has recommended that National Treasury start taking tangible steps to reduce the state staff complement and, in particular, reduce the public sector wage bill. What we pay to the state should be congruent with what we get out of the state in terms of service delivery.
Hopefully when Godongwana says the wage bill will be reformed to ensure civil servants are “compensated fairly,” he has in mind paying them significantly less.
In this respect, we further encourage Parliament to adopt fiscal legislation that prohibits National Treasury and provincial treasuries from proposing national or provincial budgets that are not balanced. It is absurd to allow government to spend more than it is able to gather in revenue, or to indebt future generations of taxpayers. Balanced budgets must be a matter of law, and budget surpluses should also be very seriously considered as a requirement for fiscal prudence.
A surplus must, of course, include debt servicing costs. So the primary surplus announced is a very useful first step, but wholly insufficient.
Tax reform
Our second category of policy change, tax reform, is intimately related.
The more government tries to do in the economy, the worse the socio-economic outcomes for South Africans. The perversity of this is manifested in how more and more South Africans are becoming dependent on social grants, funded by taxpayers, because of government misconduct.
The Social Security Agency states about 45% of all South Africans are somehow dependent on grants today. That South Africa’s tax-to-GDP ratio stands at 26%, one of the highest in the world, is therefore no surprise.
So not only are taxpayers receiving very little return on investment for the taxes they pay, but they are constantly required to pay more and more, because government policy is destroying the economy.
And taxpayers, of course, have no say in any of this.
The FMF therefore recommends that this so-called new era of governance in South Africa must be accompanied by at least a modest income tax cut for all tax brackets, and that there should be a moratorium on any further tax increases for this parliamentary term. This will at least allow taxpayers to acclimatise to the current economic reality without being required, year in and year out, to accommodate more government in their personal and family budgets.
What would also be something of a relief to taxpayers, is to reduce the complexity of taxation in South Africa. And what we identified as a simple, though not costless, reform in this regard, is to eliminate all non-standard taxes in South Africa.
Taxpayers are burdened by a bevy of things they have to pay, including sin taxes, inheritance taxes, capital gains taxes, plastic bag taxes, and potentially wealth and carbon taxes in the near future. The list goes on, endlessly.
Our proposal is that, in general, South Africa must, legally, levy only four (or fewer) types of taxes: personal income tax, corporate income tax, the value-added tax, and import/export tax.
The other taxes should all be progressively phased out over this term until only these remain, and this means that taxes should no longer be used as a tool for social engineering. Taxes exist to gather revenue for government service delivery. It should not be utilised as a means through which to change the behaviour of ordinary consumers and businesses.
Taxpayers cannot continue to be abused as they have been. The exodus of skills and capital and investment from South Africa is, at least in part, caused by the disrespect that taxpayers have been shown time and time again.
Whenever a politician has some harebrained so-called “good idea,” they automatically expect the taxpayer to open their wallets and to fund it. From smart cities to bullet trains to national health insurance, government never humbly tries to raise funds by itself, or cut spending to free up existing resources. It always either punishes the current taxpayer, or it indebts the future taxpayer.
In the FMF’s view, government must begin to rely significantly more on cutting spending, raising voluntary funds, or, best of all, reducing its own scope and leaving significant swaths of economic development to the private sector, where they belong.
Finally, but by no means least importantly, given the rise in the price of medication, the FMF is recommending that all doctor-prescribed medication become VAT-exempt. It is a wonder to us that this was not done long ago, but if VAT exemptions are about reducing the price burden of important goods on the poor, this is a no-brainer.
Privatisation
It has become clear to all thinking South Africans that the concentration risk represented by state-owned enterprises has been disastrous to our economy, especially when considering Eskom and Transnet. When they fail, we all fail, because they have been granted special state privileges that nobody in the private sector enjoys.
The FMF, firstly, recommends that any regulatory or legislative protections that state companies enjoy, must immediately and unconditionally be revoked. All state companies and private companies must compete on the same terms.
This is the most important kind of privatisation: the privatisation of functions.
But the privatisation of assets is also crucial, to provide more relief to the taxpayer and ensure scarce public resources are not wasted on bailing out companies with perverted incentive structures.
We therefore recommend that Eskom, Transnet, Denel, the Post Office, South African Airways, and PRASA be removed from the state’s balance sheet and subjected to market discipline.
The empty rhetoric around “addressing” unemployment and low growth – without anything but peripheral reforms – from this year’s mini-budget statement is an unfortunate squandering of the goodwill handed to the GNU on a platter.
[Image: https://www.flickr.com/photos/governmentza/51899826130]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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