South Africa doesn’t have a revenue problem, but rather a spending problem

What Tito Mboweni’s Medium-Term Budget Policy Statement proved again is that pinning our hopes on inflated revenue targets is unrealistic, says Steven Nathan, founder and CEO of disruptive asset manager 10X Investments, who insists that we have to change the way we spend.

South Africa collects around R1.5 trillion in revenue annually, that is a lot of money. Our tax receipts to GDP, at almost 30%, is high by international standards and around double Sub-Saharan Africa’s 15%. Yet we are always hearing about missing our revenue targets and our ballooning budget deficit.

So where are we going wrong?

“For a start, government has been way too optimistic over the years in increasing revenue targets. In some instances, it has forecast double digit growth, which is completely unrealistic,” said Nathan.

“We know the economy hasn’t grown much in the last five years. We know that the two main sources that generate tax revenues – companies and consumers – are under enormous pressure.

“We know that the tax base has been eroded with wealthy people emigrating and companies investing and spending less in the country. You don’t have to be too insightful to conclude that increased tax revenue is unlikely to be the silver bullet to close the budget deficit.”

In this context, spending R200 billion per year that we don’t have, as we did in 2019, makes no sense, the financial lead said.

“Maybe you could do it for a year or two in a time of crisis if you had a clear strategy on how this over-spending will produce longer term benefits, but to do it in perpetuity is fiscally irresponsible. Sadly, we now see an expected R300 billion budget deficit in 2020 versus R200 billion in 2019,” Nathan said.

It is not just that we spend well beyond our means, we spend badly, Nathan continued citing the education sector.

In school education we are spending in the region of R260 billion a year. Divide that by 14 million learners (which includes 6% privately educated) and you get almost R20,000 a year per pupil.

Nathan pointed to the top government schools, Model C schools where they have a 100% pass rate for five years or more: they are spending R20,000 to R30,000 a year per pupil with less than 1,000 pupils per school.

“In other words, with no economies of scale several Model C schools deliver quality education and achieve positive outcomes. Imagine what SA as a whole could achieve with a R260 billion school education budget managed in a public-private sector partnership with proven skills from Model C Schools, the private sector and government,” he said.

This approach, Nathan said, would dramatically improve the country’s education outcomes over the medium to longer term. “This could also serve as a test case for other government departments.”

“So, we have the money and we have the skills, we just currently lack the will. Let’s hope the government takes the time to consider these types of initiatives and embraces workable solutions that will benefit all South Africans. The alternative, to repeat our past behaviours, is likely to produce the same dismal fiscal results with continued low growth and high unemployment,” Nathan concluded.

Read: While ‘black tax’ is a necessary reality, it’s not sustainable

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South Africa doesn’t have a revenue problem, but rather a spending problem