Little value for money in government spending - Business Day 18th February 2010

Deservedly, Pravin Gordhan’s budget has been widely praised. But a fundamental question arises: does the country get value for money from a government which appropriates an increasing slice of GDP? Here is what John Kane-Berman wrote in today's edition of Business Day:

The proportion of GDP taken in tax has risen from 22.5% in 1994/95 to 26.8% in 2009/10. But the bigger tax take (and doubling of the public sector wage bill in five years) has been accompanied by diminishing state effectiveness.

People in top tax brackets get few direct benefits. Many pay twice over. Inter alia, their taxes finance social grants, health care, and education, but none qualify for social grants, while most pay for private health care and education.

Many also pay twice over for security: they pay taxes towards the police and then use after-tax income to hire private security.

Vast sums are redistributed via the tax system into poor households via child support grants and pensions. Taxes have helped to build houses and provide free services. Poorer households receive far more from the State than they contribute -- although they also pay in to the fiscus via VAT and other indirect taxes.

But in three key areas it is far from clear whether the poor are getting anything like fair value from all the money supposedly spent on their behalf. Crime in many poor areas is rampant, education is often non-existent, and public hospitals can be health hazards in themselves. It is difficult to prove that public schooling and health care are worse than under the previous government -- as many people claim -- but it speaks volumes for the damage the African National Congress has done to both education and health care that the question even arises.

Yet another question arises: is the country getting the full benefit from having succeeded (until recently) in reducing its budget deficit? Cutting it was always partly designed to make South Africa more attractive for foreign direct investment in the post-apartheid era, but FDI has been anaemic.

All the good work of the National Treasury has been undermined by much of the rest of the Government. The problem goes far beyond the failures referred to above. Hostility (until recently) to the mining industry, threats to physical and intellectual property rights, racial requirements, burdensome regulation, and bureaucratic incompetence all differentiate us unfavourably from many another investment destination.

Not only has FDI into South Africa been anaemic, but these factors have caused many of our own companies to invest elsewhere money that might otherwise have stayed here.

Unfortunately, however, no amount of fiscal rectitude can solve South Africa’s biggest problem: millions of unskilled people whom our labour legislation prices out of the labour market. This is a more a political than an economic problem, and the Government has been aware of it for years.

The budget speech promises support for labour-intensive industries, and talks of reforms to increase labour market participation. It also recognises that ‘our bargaining arrangements push-up entry-level wages’. Unfortunately, even though Gordhan is aware of the problems they cause, these arrangements have the support not only of the Government (which persists in pushing up minimum wages in labour-intensive sectors), and the trade union movement, but also of organised business.

These like to call themselves the ‘social partners’ but they amount to a conspiracy against South Africa's growing underclass. The Zuma government is no more likely to repudiate this alliance than it will shun its alliance with the Congress of South African Trade Unions and the South African Communist Party.

The underclass are a social, moral, economic, political, and human problem. Sometimes a few of them burn down a library, barricade roads, throw stones at local councillors, or set foreigners alight. Some of them get shot at and arrested for this. This puts them on to the front pages for a brief moment, and may even cause Jacob Zuma to drop in, but otherwise nobody pays them much attention from a policy viewpoint.

* Kane-Berman is the Chief Executive of the South African Institute of Race Relations.