Hope and dreams no substitute for sensible economic policies

While a wealth tax, basic income grant and nationalisation of banks, farms and mines may sound tempting for those battling to survive, in fact what is needed is an efficient education system and universal quality healthcare. But Sindile Vabaza, a contributing author for the Free Market Foundation, argues that Government is inefficient, wasteful and prone to capture by nefarious and rapacious actors and subjecting a largely successful private sector to these machinations would be suicidal for our economy. He cannot believe that the proposals are even being entertained after our recent experiences with loadshedding and the continuous public bailouts of Eskom. Instead, he writes that these schemes and plans will lead to a gross misallocation of resources in the South African economy which will lead to increased inefficiency, a more unproductive economy, and a government scampering around looking to international institutions to fund already unsustainable largesse. – Sandra Laurence

A basket case of demands: Wealth tax, Basic Income Grant and nationalisation 

By Sindile Vabaza*

Sindile Vabaza

On 23 February the South African Federation of Trade Unions (Saftu) and its affiliates held a protest march ahead of the country’s national budget speech calling for, among other things, a wealth tax, a basic income grant (BIG), and nationalisation of major farms, banks and mines. The Saftu march coincided with another march organised by Women on Farms Project (WFP), whose list of demands include using a wealth tax to finance land redistribution and reform, universal quality healthcare, quality education and a basic income grant. 

What is certain is that none of these demands can be seen in isolation from each other – they are driven both by the heavily statist and interventionist ideology of the Tripartite Alliance, and an underclass in our society who are tired and angry about being on the underside of the political machinations, corruption and false promises of the ruling party, which has meant that poverty and gross inequality have persisted and even increased in their lives. But these silver bullet solutions are tantalising and attractive to people whose children are hungry, whose communities are distended and whose lives are marked by desperation and lack.

Firstly, the alternatives

Quality education

It is understandable that this would be a demand at the top of the agenda because quality education is the key to unlocking upward mobility and possible wealth generation for the children of the poor and working class. According to Stellenbosch University education researcher Nic Spaull, the government spends an average of R1,600 per month per pupil in the public education system. This number compares favourably to low fee private schools such as Curro and Spark Schools, which many middle and upper middle income children attend. 

In this regard a school voucher system rather than mere additional funding would be a more effective step towards an accountable and quality education system. Additional funding will not solve the problems of ghost teachers, of inept teachers with poor content knowledge, of inefficient school bureaucracies, or rapacious teacher unions. While a voucher does not ameliorate all the vast problems within the system it does introduce the right incentives, healthy competition, and shifts power towards parents (who care about their children) and away from unaccountable and rapacious bureaucrats.

Universal quality healthcare

As it stands any definition of universal quality healthcare being proposed in this country has to be understood as advocating the National Health Insurance (NHI). Any alternative proposal has to begin with the recognition that most South Africans would prefer private healthcare over public healthcare. But the majority of South Africans simply cannot afford it in a comprehensive sense. Part of this preference is that healthcare workers in the private sector are incentivised to provide excellent care to patients who will go elsewhere if they are treated poorly. No such incentives exist in the public healthcare system, which is why stories of patient maltreatment abound in the public system.

What is instructive to proposing an alternative framework to the NHI is to look at what private firms and healthcare providers are already doing to make private healthcare accessible to more people. These efforts include prepaid health care vouchers offered by groups like Netcare and Discovery, township clinics which offer a comprehensive service around doctor visits such as Quali Health, low-cost healthcare cover offered by the likes of Tyme Health, and even the domestic worker healthcare cover offered by the likes of Discovery and Momentum.

What is clear, in light of the innovations already happening in the private healthcare space, is that something closer to the Swiss system of healthcare is appropriate in South Africa, where government funds vouchers to buy an acceptable amount of primary health care visits for every South African to a doctor/dentist/optometrist of their choice along with hospital cover that includes a trauma benefit. The economies of scale and buying power of the government should ensure that the price of these vouchers can be brought down, so as to include more in a basic threshold of care. 

Now, the problematic

Nationalisation

One of Saftu’s demands was the nationalisation of major farms, banks and mines or in the parlance of the socialist Bolivarian revolution, “public ownership of the commanding heights of the economy”. The problems with this are manifestly obvious to any South African who has dealt with a State-Owned Enterprise or any government run department.

Government is inefficient, wasteful and prone to being captured by nefarious and rapacious actors and subjecting a largely successful private sector to these machinations is suicidal for our economy. It beggars belief that this is even something being entertained in this country with our recent experiences with loadshedding and the continuous public bailouts of Eskom. There is a very real danger, with the ANC losing support and likely to fall below 50% in 2024, that the ruling party will turn to the more militantly socialist EFF to remain in power and for proposals like this to be pushed for even more aggressively.

Introduction of a job guarantee, wealth tax and BIG

Two other demands which should be seen together is that of a job guarantee scheme for the country’s 12.5 million unemployed workers, along with the BIG. Assuming that these jobs will pay at least the minimum wage of R3,500 per month, the government will be on the hook for at least a whopping R44 billion annually to fund this scheme. This is to say nothing of the inefficiency and lack of productivity this scheme will incentivise and the mismatch of skills and what our economy requires to grow and be productive.

Our public sector is already bloated and a drain on government finances which has led to the government struggling not only to keep up with above inflation increases, but also the sabotage of our wider economy by public sector workers, as seen with the recent Eskom strikes when the workers did not get these untenable increases.

According to research firm Intellidex, the ‘least bad’ option to fund a BIG would be to raise VAT to 17%. A separate report by the National Economic Development and Labour Council (Nedlac) found that a wealth tax and hikes to income and corporate taxes on top of a VAT increase would be needed to make a BIG feasible. 

The introduction of a wealth tax would have adverse consequences such as capital migration, disincentives to save, and a dampening effect on entrepreneurship and employment. A substantial proportion of South Africa’s wealth is also held in retirement funds; these represent a major component of lower income earners’ wealth. It can be argued that any form of wealth taxation will be largely ineffective if retirement funds are granted complete exemption, but the imposition of a wealth tax on retirement funds will create profound administrative complexity, unless imposed at a flat rate on gross assets. The downside of this would make no distinction between affluent and non-affluent retirement fund members.

All of this is to say that these schemes and plans will lead to a gross misallocation of resources in the South African economy which will lead to increased inefficiency, a more unproductive economy, and a government scampering around looking to international institutions to fund already unsustainable largesse. 

  • Sindile Vabaza, an aspiring economist and an avid writer, is a contributing author for the Free Market Foundation. The views expressed in the article are the author’s and not necessarily shared by the members of the Foundation.

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