Saturday, 25 February 2017

Assessing the Budget Speech

So I was pretty close with my predictions on the budget, though they weren't too hard to call for anyone. One thing that did surprise was the new tax bracket: 45% for those earning more than 1.5 million. We'll get back to that one though.

In the immediate aftermath of the budget speech there was nothing but praise for Gordhan for masterfully negotiating the political tightrope he had found before him. But I think there has been enough analysis on that. I want to focus on what the budget actually means for South Africa.

Perhaps the most notable point is how much emphasis Gordhan puts on reducing the deficit, but while doing almost nothing about it. There was no sign of spending cuts, not even the same admonition to end wastefulness that was given last year. Instead there were increases in social grants (which, as it stands, may not even make their intended destinations) and billions more thrown at education. Now I can sense the immediate protests of "But we need more money for these things!" I'm afraid though that if we keep raising the debt to finance welfare, we will get to the point where it will be impossible to pay for these things at all. Especially in an economy that is growing at hardly above 0%. As much as we want to be charitable, we need to be sustainable to survive. And a budget deficit, especially in our economic climate, is not sustainable.

The little that was done to address the deficit involved raising taxes. unfortunately this is a self-defeating method for such an aim. Having a balanced budget is simple. Income must equal expenses. So if expenses exceed income we can either reduce expenses, which Gordhan hasn't done, or we can increase income, which for the government is tax income. But this is where Gordhan went wrong: increasing the tax rate is not the same as increasing tax income. In fact, the very opposite is true. Often decreasing the tax rate leads to an increase in tax income in the long run. Why? Decreasing the tax rate attracts investment, investment brings economic growth and economic growth results in there being more money to tax.

This is where the new tax bracket comes in. Instant logic argues that 4% is not that big a difference, especially for people earning more than one and a half million a year. If someone can pay 41% surely they can pay 45%. Looking more deeply one may consider that for a lot of people that 4% could be the straw that breaks the camels back. There is only so many times you can take just a little bit more before all the little bits add up to a whole lot. And 41% is already a lot. So that 4% could well drive many people out of South Africa, to countries where they both earn more and keep more of what they earn. And you may say, "Oh, it's only 100 000 people that are affected, and only a fraction of them will leave anyway." But remember, these 100 000 are the people who contribute most to our economy. They are doctors, lawyers, engineers, and especially businessmen and entrepreneurs, the people who have the potential to grow the economy and create jobs. We have already been experiencing a mass exodus of these people and can't afford to lose any more. Marginalising the wealthy has a negative affect on all of society.

Unfortunately a budget that is good for our economy and for the people of South Africa is impossible in this political climate. So taking that into consideration, I too shall have to render my praise to Minister Gordhan for the budget he presented in such trying circumstances.

Tuesday, 21 February 2017

Preparing for the Budget Speech

It's a good thing that Pravin Gordhan is not one who is easily rattled. At least he doesn't show it if he is. Very few people in any job could be in a more stressful situation than our finance minister is in now. Multiple branches of the ANC are calling for his head, a rumoured potential replacement has been nominated for parliament, and he is preparing for the most important public event on his calendar, the budget speech, which needs to balance powerful conflicting interests.

With the ANC under pressure and policy tide turning toward populism as a release valve on the one hand, and an ailing economy in desperate need of some freedom therapy on the other, Gordhan has his work cut out. He is walking a tight rope. What we want him to say is this: "We are privatising the SOEs, phasing out state welfare and cutting taxes." This would catch the ears of the business world and spark a new era of economic growth. The rand would literally jump in value, but he would certainly lose his job. The ANC Youth League, Women's League and the MKTV would be joined by a host of more conservative ANC structures and members in calling for his head and Zuma would garner more than enough support to bring down the axe. But it's nice to fantacise about a budget that would actually help the economy.

To win back his detractors would require exactly the opposite of what we need. Increase taxes on the wealthy, more welfare and tons of investment in black business. However Gordhan is both intelligent and moral, at least when standing next to many of his ANC comrades, so there is no chance this will happen either. Besides, I doubt he could care less about what Collen Maine and company have to say. No exponents of this line of thinking have ever shown any understanding of economics, or even the ability to predict the consequences of ones actions. Unfortunately these people can say whatever they like, since they are not in a position to make the decisions and so will never be held accountable. No wonder Gordhan ignores them.

What is likely to happen is this: subtle tax increases attempting to raise tax income without driving away investment and subtle spending cuts in an attempt to reduce costs without sending the populists into a state of outrage. This is why he left big issues like income tax and SOEs alone last year and will probably do so again this year while focusing on things like sugar and sin taxes and cutting down on wasteful expenditure.

So I have pretty low expectations for this budget speech. I don't see anything radical happening, for better or worse. Gordhan, for the sake of keeping his job, without ruining the economy, will probably just deliver more of the same. But I hope I'm wrong.

Friday, 3 February 2017

#FeesMustFall: Freedom Must Rise

This is an article I am submitting to project rise: a forum to discuss what must happen after #FeesMustFall.

The funding crisis in higher education in South Africa right now is perhaps the most prominent political issue of recent years in our country. It has affected hundreds of thousands of students as well regular citizens. It is siphoning huge portions of our thought and discussion. It is one of the biggest problems we are facing as a country. Except it isn't. When we look at the bigger picture, problems with our higher education system are drowned out by far more significant issues, like 40+ percent unemployment, 17 thousand murders a year and a similar number of rapes, 0% economic growth and rampant corruption by an ineffective government. Yet #FeesMustFall continues to draw the lion's share of activism from around the country.

But why is such a comparatively insignificant issue getting so much attention? The most obvious reason is that those with the zeal and energy for activism are the ones  directly affected by this issue. #FeesMustFall has a far more obvious, direct impact and an 18, 20, 23 year old graduate than the greater, yet more subtle influence of unemployment, or stagnant economic growth.

In addition to this, the lack of critical thinking and desire to research within general South African culture, combined with almost ubiquitous frustration with our country's social and political situation creates a sheep culture, where all it takes is a few charismatic individuals to advance a cause before everyone is jumping on the activist bandwagon, trying to change the world, without ever bothering to think through how that is going to happen, only considering the surface issue and never looking at knock-on effects. The narrative is this: granting free education to everyone will solve all our problems by reducing income inequality, emancipating the poor and filling the market with graduates who can then be used as a catalyst for economic growth and job creation.

There are numerous problems with this logic. First, access to higher education isn't necessarily going to produce more graduates. Already we see that most students who enter university don't come out with degrees. Why? Because students don't come out of high school prepared for the rigours of university. Our high school system is not up to the task and our primary school system is a major problem. And even pre-school - how are we supposed to solve a higher education crisis when we can't even get pre-school right? Simply put, the majority of students enter university without having developed the cognitive ability to succeed.

Then there is this myth that graduates create jobs and spur economic growth. No. Graduates fill positions created by entrepreneurs. Being an entrepreneur does not require a university degree. Never in any society have graduates been the catalyst for economic growth. Problem solvers with freedom to express themselves, both the educated and non-educated create economic growth. And the major issue is that we do not give these people this freedom. We rely on the government to solve our problems. We don't all go and work on the problem ourselves till someone finds a solution. It is too easy to pass the buck.

So if free education is not going to solve these problems what is? Freedom is. In answer to the question, "What must rise?" freedom must rise. And don't get confused between freedom and free things. Government stepping in to solve people's problems is not freedom. It is interference. It is not sustainable and frankly a violation of basic human rights. In order to solve our problems we need government to get out the way. Government funding of education along with the numerous other social welfare programs is what is preventing access to education. Not so called "white-privilege". High taxes to fund the welfare state, strict labour laws and disproportionately over-powered trade unions strangle opportunities for those with the ability to make the economy grow. They run away because they have no chance of making a return on investment. By relaxing labour laws and reducing taxes we will create opportunities for businessmen to make profit. This leads to investment, which leads to economic growth which in turn creates jobs. And whilst graduates are not necessarily the cause of economic growth, they are necessary for it to happen. When companies need people with certain skills they will find them until there are no more to be found (this happens quickly in a high economic growth environment) and then they will start making them. That means scholarships and bursaries. So the government doesn't need to fund higher education. It needs to give the private sector space to grow and they will fund higher education.

So I'm not saying the university crisis is a non-issue. It is an issue. A big issue. But it's a secondary issue. It is a symptom, rather than a cause. You can treat a symptom, but it will come back. When you treat the cause - lack of freedom - the symptom goes for ever.