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.

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