VAT trap: How the ANC’s patronage state is starving South Africa’s Future - Mills/Hartley

Key topics:Public sector jobs doubled since apartheid, now near 1.8 millionOver 30% of budget spent on just 4% of the populationCorruption and inefficiency drain R250bn annually from the state.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Greg Mills* and Ray Hartley*.Although the number of South African public sector employees is supposedly 1.2 million, this figure is misleading and low.The number of total state employees – including military, police and state-owned enterprises along with national, provincial and local government — has doubled since the end of apartheid to just under 1.8 million people, according to figures released by the government in 2022. This was made up of some 395,000 in national departments, 912,000 across the provinces, 342,000 in local government, and 118,000 in the 700 (on paper) State-Owned Enterprises.And this does not include the other persons earning government money such as the million engaged in the Expanded Public Works Programme jobs and the 28 million South Africans who receive welfare payments.The scale and rate of increase of public service jobs is mostly the result of the ANC having to deliver to its constituents in a low-growth economy where government employment is the shortest route to wealth, exuberantly detached from the grim, grinding realities faced by most South Africans.However, this vast public service, which is well paid (no fewer than 55,000 earn more than R1 million a year), absorbs scarce revenue which ought to be going towards infrastructure. In any event, in the digital age, efficiencies should be measured by systems and not by the headcount of a sclerotic bureaucracy..Self-licking lollipop.Diverting much-needed funds for capital expenditure into a bottomless pit of consumption becomes a self-licking lollipop of low growth and high spending. Nearly 61% of non-interest government spending – or R6 of every R10 collected − is on the social wage bill, including health, education, social protection, community development and employment programmes, amounting to over R1.7 trillion in 2024/5.The public sector wage bill alone is R721 billion a year, almost twice the number of ten years ago. According to the National Treasury, this is the third-largest public sector wage bill (behind Iceland and Denmark) as a proportion of GDP.In other words, over 30% of the budget is used to satisfy the immediate employment demands of less than 4% of the population.This all has to come from somewhere. The Treasury’s 2024 Budget Review shows that 7.4 million individual South Africans pay income tax. Then there are international borrowings, as well as the recent controversial VAT hike. As a consequence of the funding gap created between low growth and high consumptive expenditure, the percentage of debt to GDP rose steadily during the 2000s, from under 40% at the turn of the century to 75% now..Read more:.Nicholas Woode-Smith: Public sector workers drain South Africa dry.Similar imperatives.South Africa is not alone in this challenge. The furore around President Donald Trump’s methods, including his recent “discounted” tariff plan, obscures the similar imperatives facing the United States, where the Federal Government – which spends 5% of its budget on salaries − has become a target of public opprobrium. Under Trump, the “move fast and break things” approach to cutting US government spending and reducing its workforce has been effective or controversial, depending on who you listen to.Elon Musk claims to have saved the US fiscus billions and to have removed thousands of unproductive programmes. But he has also erred by cutting Ebola prevention funding and nuclear safety workers, leading to a mad scramble to contact and rehire them.Musk has responded by saying that, when such errors occur, they will be corrected by rehiring the dismissed officials or reinstating the programmes..Untested.This application of tech startup logic to government is untested.In the words of Peter Vanberkel in The Conversation: “Musk’s approach is extremely disruptive. When analyzing a set of tasks to accomplish a goal, his default is to eliminate as many of them as possible, striving to overcut by at least 10%. If he doesn’t return 10% of the tasks to the process afterwards, not enough were cut in he first place. In Musk’s ‘productivity algorithm’,” not cutting enough tasks is an error to avoid.”What is clear, however, is that government departments and agencies are not very good at policing themselves when it comes to efficiency.There are few countries in the world more in need of a Department of Government Efficiency than South Africa, where the state has become the financier of a large class of politically connected contractors, tendepreneurs and rent-seekers.The system, rather than the individuals, is at fault. The supposed developmental state quickly became a patronage state, in which those with the requisite skills are a minority, and where the past is used to justify the present and the future.Among the middle classes, rents find their way into the population through the public sector. It may be larger, but it is less effective as productivity has declined. Poverty, too, has got stuck and remains at 55% of the population. Through welfare grants, South Africa has helped remove poverty’s most bitter edges, though this remains a problem as much for the fiscus as for the economy, which appears unable to create an off-ramp from this system of dependency..VAT imbroglio.While the system of expanding public service numbers and welfare payments may have solved some short-term political problems for the ANC, it has created longer-term economic ones, notably by stressing public finances. Hence the VAT imbroglio.The answer to the conditions that created this crisis lies in a series of poor policy decisions and a bureaucracy less and less able to implement them; de-industrialisation due to poor labour-market choices and overregulation; energy scarcity due to poorly run state enterprises and slow actions in bringing on board the private sector; cadre deployment and corruption hobbling the public service; and a reliance on a creaking infrastructure.Although professing to want deep reforms, the ANC balks at practical plans being put on the table. This is what the DA did when it attempted to link its support for a reduced VAT hike to the GNU accelerating reforms such as the concessioning of ports and rail. South Africa’s average sea freight transit times are more than twice the global average and six times the best in class (Singapore) due to port congestion and slow processing..Removing obstacles.A SA DOGE might start by removing obstacles in the way of the Special Investigating Unit and prosecutors and including the Auditor General to overhaul the fetid network of crony contracts and wasted money that has driven South Africa into a budgetary crisis.There are very few who would argue to the contrary – that government spending must be well-managed and without wastage.The evidence is right before our eyes. The reports released by Auditor General Tsakani Maluleke are always big news. The nation is continuously “shocked” to discover the depth of unaccounted for and wasteful expenditure, to the point that it is numbed.But the Auditor-General cannot claw back the lost money, and it is left to the same political office bearers who committed the original wrong to correct the problem. Unsurprisingly, progress is slow. In Maluleke’s words, “While we continued to produce strong insights, these can only have the long-term impact of improving the lived realities of ordinary South Africans when our stakeholders begin acting on them.”.SA’s public-sector healthcare crisis: Post-Comserve doctors bear the brunt.It’s one thing to know money is being abused and misdirected, it’s another to stop this from recurring.Perhaps no grander example of this gulf between knowing and acting exists than the Zondo Commission’s report into state capture, where the shocking truth about the depth of financial depravity was laid bare.Key wrongsThe summary of the commission’s findings by the Public Affairs Research Institute includes the following description of the key wrongs uncovered:the allocation and distribution of state power and resources, directed not for the public good but for private and corrupt advantage;a network of persons outside and inside government acting illegally and unethically in furtherance of state capture;improper influence over appointments and removals;the manipulation of the rules and procedures of decision-making in government in order to facilitate corrupt advantage; anda deliberate effort to undermine or render ineffectual oversight bodies and to exploit regulatory weaknesses so as to avoid accountability for wrongdoing.The commission named no fewer than 97 political leaders who were beneficiaries or responsible for abuses. None have faced any criminal consequences, and several enjoy high-profile roles in President Cyril Ramaphosa’s Teflon administration.The only action taken appears to have been by the ANC’s “Integrity Commission”, which announced it would “summon” those implicated to explain themselves in December 2022. This ethical bar is about as high as Iran’s chairing the UN Human Rights Council.The information is there, supplied by the hard work of the Auditor General, Commissions of Inquiry and some excellent investigative journalism. What is missing is decisive, courageous, politically neutral action to stop the rot by shutting off the financial taps.Saving the fiscus billionsA South African DOGE could do this, saving the fiscus billions. The reason why it doesn’t happen is the same reason why the DA was stonewalled over linking the VAT increase to progress on reforms: the ANC likes it the way it is. The comrades all accrue their rents, and the taxpayer gets hit harder and harder to fund their lifestyles as the economy staggers on.According to a Unite 4 Mzanzi investigation, South Africa lost R1.5 trillion through corruption between 2014 and 2019. The organisation, led by the SA Institute of Chartered Accounts, asked Stellenbosch University’s Centre for Complex Systems in Transition to conduct the study.“It is broadly estimated that there was a whopping R1.5 trillion lost to our country between just 2014 and 2019. This is not to mention that some of our elected leaders continue to steal from the poor, hungry, sick and dying,” said Bonang Mohale. The state is estimated to be continuing to hemorrhage R250 billion annually in wasteful and criminal expenditure.Change requires making different choices, and it’s never easy because there are always some who benefit from the way things are. The ruling party has managed to set up a system which is simply self-defeating for the country.South Africa remains hostage to the ANC and the system of governance it has instituted. After so many years of rampant corruption, it would be naive to think that vested interests and patronage could just disappear overnight, a lesson that the DA and, by extension, the country has just learnt in their failed efforts to make conditional the VAT hike.Populist blowbackFor an atavistic ANC, being seen to be acting in the interests of the public sector over the interests of the South Africans public per se risks a Trump/Musk-style populist blowback.It’s not hyperbole to state that absent the reform the government says it wants to do and never does, including a redirection of public funds to capital investments, South Africa is doomed, now and in the future..*Greg Mills heads the Johannesburg-based Brenthurst Foundation, and is a Senior Associate Fellow and Advisory Board member of the Royal United Services Institute.*Ray Hartley is the Research Director of the Brenthurst Foundation. He previously edited the Sunday Times, The Times, Rand Daily Mail and BusinessLIVE..This article was first published by Daily Friend and is republished with permission.

VAT trap: How the ANC’s patronage state is starving South Africa’s Future - Mills/Hartley

Related Stories

How can you thrive in South Africa’s enclave future?

Motsepe credits partnerships for reviving South Africa mining sector

South African law firms challenge equity code in court

“Exactly the wrong policy”: DA's Burke says taxpayers will pay more under ANC procurement rules