The number that’s killing South Africa

 ·24 May 2024

The South African government is terrible at spending tax money—so terrible, in fact, that for every R1 it spends, the economy shrinks.

This is represented by a number called the fiscal multiplier, which is used to gauge the state’s effective spending.

According to research from the IRR, ideally, any government would want this number to be larger than 1.0.

“When the fiscal multiplier is larger than 1.0, it means that for every R1.00 the government takes out of the economy through taxes and then puts back into the economy by spending it, it grows the economy by more than R1.00.

“In other words, it is adding value,” the group said.

However, when the fiscal multiplier is smaller than 1.0, it means that spending R1.00 produces a GDP impact of less than R1.00.

The problem for South Africa, the IRR said, is that the country’s fiscal multiplier isn’t only lower than 1.0, it’s in negative territory.

This means that the government has not been creating any value with its spending, and the economy has been declining.

While some in government would be at pains to shift the blame to the Covid-19 pandemic—and point to expected GDP growth of around 1% in 2024—the IRR’s data tracked the fiscal multiplier to 2019, before the pandemic hit.

The reasons for this happening are apparent.

“This is shocking evidence that in South Africa, resources are being badly misallocated by the state,” the IRR said.

According to Old Mutual Wealth Investment Strategist, Izak Odendaal, while the government has increased the quantity of its spending, the quality of its spending has declined.

Money spent has been wasteful, misallocated, or lost to corruption, meaning it goes into a black hole that produces no value for the country or the economy.

For instance, education gets the biggest allocation in the budget, but clearly the country is not producing the skills it needs. Health gets another chunk, but the government has mismanaged public healthcare so badly that it has to force systems like the NHI to siphone more funds from taxpayers.

Another example given is the hundreds of billions of rands that have been poured into Kusile and Medupi, neither of which function correctly after more than a decade, despite being brand new power stations.

The second reason is that the government’s increased spending has been funded through borrowing, while its creditworthiness has deteriorated to the point South Africa is a junked economy.

According to the IRR, this leaves South Africa in a situation where it is actually of more value to the economy to give the state less, and rather leave money in the hands of taxpayers and citizens.

“The quickest and fairest way for the government to leave more money in the pockets of ordinary consumers is to lower the VAT rate. That way all South Africans will benefit from having to pay less for the goods and services they buy, leaving them with more money to spend on the things that matter to them.

“This will help stimulate the economy as more disposable income means more consumer demand, without the need to print money; it will also give some people scope to save some of their money for the future, which helps make money available for companies to invest in growth.”

The group said that lowering the VAT rate to 11.5% from the current 15% would reduce taxes paid to the government by R100 billion. However, it argued that it could easily recover this and more by simply spending more effectively and being less corrupt.

“According to our conservative calculations, there are R150 billion available in state savings, ready for the taking just by clarifying the procurement rules and making sure the state gets value for money when it buys things.

“Saving R100 billion out of the R150 billion available should be quite achievable. This is a simple way in which the government can spend our money in better ways,” it said.

Read: The companies that could be big winners with the NHI

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