As South Africa navigates its first budget under the Government of National Unity (GNU), austerity measures aimed at controlling government spending raise concerns. While reducing the public sector wage bill and cutting expenditures may stabilize the country’s debt, these measures must be paired with tax reductions to avoid burdening citizens with higher taxes for fewer services. A balanced approach, including fiscal discipline and tax relief, is crucial to foster economic growth and sustainability.
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By Zakhele Mthembu
With the first budget of the Government of National Unity (GNU) having been tabled in parliament, there seems to be a continuation, if not a stronger insistence, on curbing government spending. However, will this result in the expected outcome of a bigger and stronger economy?
What is described as ‘austerity,’ which involves cutting government spending in our case to stabilize our debt-to-GDP ratio, is a good way of controlling the excesses of politicians. Instead of acquiring more debt or having your central bank print more notes, as was the case with our Zimbabwean neighbours, austerity is the best option available.
The government’s primary source of revenue will always be taxes. Therefore, the more the government spends, the higher the chances are that we, as citizens, will be paying higher taxes. South Africans are taxed excessively, from a value-added tax that adds a 15% cost on the sale of most goods and services at every stage of production, to taxes on fuel, property, inheritance, investments, and income.
These taxes primarily fund the state, with personal income tax making up a majority of the government’s revenue. It makes sense to expect that when a reduction in spending is being discussed or proposed in the legislature, it would be accompanied by a reduction in taxes for ordinary South Africans.
The Minister of Finance claimed that the reduction in spending will be done by decreasing the public sector wage bill. This will be done by encouraging early retirement for civil servants. This reduction in the state’s spending in these areas aims to limit the government’s debt obligations and spur economic growth.
Fiscal discipline is welcomed by proponents of the free-market economic system. For this free-market fundamentalist, fiscal discipline must result in lessening the tax burden on ordinary citizens. An increase in spending, like the proposed NHI, is always accompanied by an increase in tax obligations, so a decrease in spending should lead to a decrease in tax obligations.
Reducing taxes has the effect that Treasury seeks through cutting spending. Economic growth will naturally follow from the extra disposable income people will have with a reduced tax burden. This will allow people to have more money to spend, invest, or use in the broader economy, without it being absorbed by the state coffers.
The danger of austerity that does not result in lowering taxes is that citizens continue paying high taxes for fewer services. The proposed early retirement of 30,000 civil servants, at the cost of billions of Rands, is an example of this.
Those civil servants fulfilled functions within the state and contributed to the delivery of services to citizens. When they retire without being replaced, it will likely lead to a reduction in the quality of service delivery.
South Africa’s high public sector wage bill, about which Treasury has been ringing the alarm bells, rightfully so about, is not a result of a high headcount in terms of actual number of people employed, but rather due to high compensation for those who are employed in the state. Therefore, reducing the headcount further will not address the primary problem, which is the unreasonable wage expectations of public sector unions and their members regarding remuneration.
Until the issue of unreasonable wage expectations in the public sector labour market is addressed the source of the problem will persist. Instead of cutting jobs, a reduction in the cost to the company could be a solution. Things such as eliminating allowances or freezing salary increases until the nation’s debt stabilizes.
Another possible solution suggested by the OECD in its economic survey of South Africa would be index future wage increases to aggregate productivity growth. This means that all public sector wage negotiations would be premised on the productivity and level of service delivery that public servants deliver to us as South Africans.
These solutions may be unpopular with unions and their members, but faced with the alternative of job losses, they may be willing to compromise. Importantly though, these are solutions that will have the result of limiting spending whilst not lowering the quality-of-service delivery by lowering public service headcounts, especially since tax cuts are not being proposed.
The ultimate answer to our debt problems, which do require austerity, would be to limit the state’s responsibilities and leave most societal functions for citizens to handle privately. A government that is limited to protecting property, liberty, and life is the best way to prevent spending from getting out of control, leading to debt, and ultimately requiring austerity.
Treasury should consider the prospect of lowering taxes as a complement to the spending cuts they are proposing. Both measures, not just one separately, are needed to steer us away from the path to serfdom that our country has been on.
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*Zakhele Mthembu: BA Law LLB (Wits) is Policy Officer at the Free Market Foundation.
