The shift left was Left in the details

Pravin Gordhan’s medium-term budget statement didn’t garner much excitement yesterday, unless perhaps if you have recently submitted your CV for a job in one of the government departments. Most-favoured state civil engineering contractors will also most certainly be quite pleased. The 30% plus unemployed South Africans will be smiling too, yet unbeknownst to them, they will be getting more of the fiscal policies that have impoverished them in the past, driving them into an even deeper hole.

Winston Churchill said some years ago:

“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

We could paraphrase Churchill’s statement that for a nation to borrow itself into prosperity is just as pointless. The feared leftward leap wasn’t in the rhetoric, it was in the numbers. The treasury’s revised estimate of its overall borrowing requirement (including parastatals such as Eskom) will rise to nearly 12% in 2009/10. Investment by public corporations is back up to a height last seen in 1981. Furthermore, government expenditure as a percentage of GDP is projected to jump from 26% in 2006/07 to 35% this fiscal year, and to remain at this level until 2012/13. If a recovery in the private sector is not forthcoming, expect the government’s share to rise, not to remain flat. The official fiscal deficit trajectory would mean SA’s overall public debt doubles to pre-Manuel levels of around 40% of GDP, wiping out all the hard-earned gains of the prior decade, as freeman put it the other day.

The fact remains that a government cannot support an economy. The government is unproductive: it is a capital consumer, not a capital creator. All the government can do is redistribute wealth, as it taxes some to give to others. By borrowing its revenues today the state still only brings future consumption forward to boost the economy today, leaving the unpopular tax increases to a future political administration. The tax increases are inevitable and cannot be avoided. Unfortunately the voters remain unchanged and are left with the bill. Our fear is that should an economic recovery be weaker than expected, the government will take the easy way out and use the invisible tax to make up for the further revenue shortfalls.