Budget Watch

Though budget sure to trigger a polarising debate

Finance Minister Malusi Gigaba
Gigaba.jpg

Minister of Finance, Malusi Gigaba said his upcoming budget involved tough decisions to stabilise the country's debt and the country will experience some pain as a result.

Speaking on the side-lines of the World Economic Forum in Davos, he also said the budget, to be introduced at the end of February, would involve interventions in order to boost confidence and grow the economy, as part of what he described as "a difficult fiscal framework."

One can expect a wide, polarising public debate to follow, while globally consensus amongst experts are breaking down about some conventional economic wisdoms, much of which still inform participants in the debate and key decision makers in the economy.

Research done at the business school of the Queensland University of Technology (QUT) in Australia has, for example, found contrary to conventional wisdom, and strongly held views by organisations like South Africa’s Free Market Foundation (FMF), that companies which have to pay a greater percentage of their revenues as tax, provided shareholders with a larger return on investment. This happens both through dividends and share capital growth.It also found that share prices were more likely to increase.

The researchers looked at dividends, share price returns and income tax data of ASX200 listed companies from 2012 till 2017.

“Clearly, factors besides tax may have influenced these results, however, the fact that shareholders appear to achieve greater returns from corporations which are less aggressive tax planners, and pay a greater percentage of tax is reason to pause,” their report states.

Use of the right tools

Hopefully the debate about what the expected increases taxes can, should, and will do to the SA economy in terms of growth, job creation, investor confidence and so-called capital flight, will not again, as it usually does, descend into a shouting match. It has become a subject worthy of more mature debate.

For instance, a closer look needs to be taken at the tools employed by Minister Gigaba to increase the fiscus’ tax income.

It’s important to note that the QUT researchers’ findings were based on the Australian tax regime as base, and they point out that perhaps the most obvious explanation for their findings is Australia’s dividend imputation system – company tax paid ultimately being refunded to shareholders.

Australia is one of a limited number of countries with such system, ensuring company profits are taxed only once – in contrast with the US, and South Africa, operating under a classical system where profits are taxed at company level, and again in the hands of shareholders receiving dividends.

South Africa used to have a system like Australia’s. However, under political pressure for so-called wealth taxes, it was abolished some years ago – individual shareholder again taxed on dividends recieved.

Interestingly, the International Monetary Fund(IMF) also recently announced upwardly revised global growth forecasts, partly attributed to the expected impact of recent US tax policy changes, reducing the federal corporate tax rate from 35% to 21%.

However, reducing corporate tax alone, will not stimulate economic growth. Clearly what happens tax-wise, with dividends also plays a role.

Then, the statutory corporate tax rate is of special interest to multinational corporations, and investors who shift profits from high tax countries to lower tax countries.

A ‘wealth tax,’ disguised as higher corporate tax, is bound to see profits made in South Africa, disappear to other jurisdictions – especially if the investor is taxed a second time on dividends.

What is real economic growth?

One can expect to hear quite a bit about ‘economic growth,’ and what is needed to achieve it, about the reduction of poverty and about the creation of an inclusive, economy. Expect the debate to become heavily politicised.

 However, also the conventional tool to measure ‘economic growth,’ gross domestic product (GPD), is increasingly coming under critical scrutiny.

Edward Jung once called GDP a misleading indicator of economic health and well-being that sabotaged development and innovation. A growing number of researchers, economists, industry leaders, and policy makers believe GDP is a poorly devised relic.

Usually compiled annually, GDP is the total monetary value of all final goods and services exchanged within a specific economy over the measured period. It can be expressed as ‘real GDP,’ adjusted for cost of living increases, or as ‘GDP per capita, indicating the mean level off economic health of individuals in a specific economy.

Not only does GDP include all transactions, even financial transfers, that don’t really ‘produce’ anything, but it could show strong growth on the back extremely negative events, like natural disasters requiring huge reconstruction spent to replace lost infrastructure.

In short, GDP is not an accurate measurement of the median wealth, actual standard of living, or economic wellbeing. When it is then also broken down on racial lines, as most often happens in SA, its usefulness declines even further.

According to a 2014 article in The Telegraph, the United Kingdom’s Office for National Statistics (ONS) has already started giving "greater prominence to broader indicators of our economic well-being, “that could finally mark the end of the most closely watched statistic in economics – GDP”.

GDP does not directly account for things like leisure, environmental quality, levels of health and education, activities outside the market, changes in inequality, and many other factors which have a positive- or negative value society may place on certain types of output.

For example, the US’s per capita GDP is higher than that of Germany, but does it prove a higher US standard of living? Not necessarily, because the average US worker works several hundred hours more per year than his German equivalent.

Measuring poverty

We are likely to also hear a lot about the alleviation of poverty, which is an even more difficult concept to quantify.

A 2010 article in the Oxford Research Encyclopaedia stated that “a common belief among economists is that the benefits of economic growth are rarely experienced by the poorer sections of society. An important issue is how to measure global poverty accurately.”

Poverty is a very broad notion, which historically has inspired not only economists, but sociologists, philosophers, anthropologists, and political scientists to research it.

Nobody has thus far been able to come up with broadly accepted definition, never mind a measurement, of poverty. The best we could find is a 1993 one by Amartya Sen that “an individual’s wellbeing, or lack of it, comes from a “capability” to function in society.”

The capability approach broadly implies that the poor are denied freedom in terms of choice of functioning, not only due to lack of basic necessities such as food, clothing, and shelter, but also lack of access to better health, education, and political participation.

In short, the subject of economic wellbeing/poverty is a very subjective subject. And, positions in debates on it is most often heavily influenced by biased opinions, and can become heated and emotional.

This was illustrated last week when the Free Market Foundation attacked a report by the internationally respected charity, Oxfam as “dangerous and intellectually dishonest.”

Gigaba’s challenge

It is into this confusing and extreme environment, that Minister Gigaba has to launch his budget. And, we haven’t even touched on the domestic political minefield, perceptions, and known facts, about corruption levels in the country, etc.

As he indicated in Davos, he needs to be mindful of the ‘judgement’ by international rating agencies still ahead, the cloud of state enterprises, in disarray after years of state capture, political, and ideological factions in the governing party and the uncertainties surrounding President Zuma’s position.

There is a possibility that the latter might be largely out of the way by the time the budget comes around. However, it will take years, and calm leadership to clean-up the mess the Zuma-era leaves behind.  And along the way new curve balls might still develop – just imagine new facts about serving cabinet members popping up.

Gigaba’s predicted “pain” might just also trigger some serious social unrest.

by Intelligence Bulletin Team

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