SANE Views

Vol.6 No.41, 29 November 2006

Nedlac Medium Term Budget Consultation

By Margaret Legum

The Medium Term Budget is a good opportunity to examine policy direction rather than its detailed application in an annual budget. Thank you for the occasion to do that with you.

The effect of government’s reliance on GDP-measured economic growth as a means to make significant inroads on poverty has proved stubbornly elusive. We can argue about how many livelihoods/jobs have come on stream, or been lost, in any period; whether an occupation that yields less than is needed to sustain life can be regarded as employment; how the provision of the social wage in the form of utilities should be set against lack of income. But it is common cause that poverty, unemployment, effective exclusion, deep demoralization, human waste and widespread distress stalk our land on a huge scale. At least twelve million households are effectively without income. And that lies at the root of the social evils of crime, delinquency, poor parenting, school performance, violence in the family and on the streets, crammed jails, community disintegration.

Certain assumptions behind current concepts of growth are responsible for this failure, and should be replaced. The deepest, because the most widely accepted, is that the private sector is able to solve the problem of unemployment. It is assumed that government’s role in job-creation is to provide the conditions under which the private sector creates jobs. That may have been so in the past; it is no longer true.

Three new factors have entered the global economy since the 1970s. First, mobile capital allows investors to seek the lowest labour costs globally, and the highest return on capital. They must do both of these to remain competitive and retain investors. That means that by its operation the private sector automatically and systemically moves buying power to the top of the income ladder from its bottom; and in that way loses purchasing power for the system as a whole. Capital’s mobility puts it out of reach of governments’ ameliorating influence on income equality.

A smaller proportion of the incomes of the very rich is spent into the economy: a relatively high proportion is held in the financial sector, out of the sectors that create employment through real investment in the economy. That loss of buying power is stifling the private sector itself, which is routinely at least 30% ‘over-supplied’ – effectively under-demanded. That surplus could easily be absorbed, to the benefit of the economy, and without inflation, if the poor were given purchasing power.

Second, digital technology differs from that applied in the industrial revolution in that it routinely loses more jobs than it creates. This world-wide trend is contradicted only for a brief period when a country first modernizes its economy – which South Africa did during the apartheid years, as some Asian countries are doing today. After that it simply reinforces the jobless growth of the current growth path.

Third, in the global competitive market, state-of-the-art technology is essential for success. Therefore labour-intensive growth is impossible in the export-centred growth market. The open global market has routinely reduced the capacity of every country in Africa, because its enterprise is unable to compete: it has been refused the right to protect infant industries as have all developed countries in the past.

For these reasons, the growth path our government has chosen is systemically pro-rich, and cannot meet the right of the poor to an inclusive place in the economy.

A Basic Income Grant (BIG) should be seen in this light: not as a desperate measure to keep people alive but as a mechanism to move purchasing power to where it will bring excluded people into the economy as consumers and producers.

The same objective will be reached when government accepts that the private sector cannot create sufficient jobs - either as an objective or as a bye-product. But the government can do so. Through its responsibility to meet the economy’s need - for educated and healthy people (human infrastructure); an effective justice system; a proper network of public transport; public housing, water and energy supplies; roads, ports and airports; a flourishing arts sector and effective research in all these areas - government can become a developmental state. If, for example, a million people were employed to combat HIV/AIDS we might defeat it; otherwise we will not. We have the people to do that; so need to employ them.

This is routinely dismissed as unsustainable, meaning that the resources would not be available under current systems of taxation. We accept that is probably true: progressively lowered taxation, as presently defined, has become the global norm in the past three decades.

But the government could raise substantial sums through introducing transaction taxes of various kinds. They meet the three main purposes of taxation: revenue, equity and benign effect on people’s behaviour. They would be pro-poor, because progressive. They would fall largely on the financial sector, which is currently under-taxed. They would be extremely easy to collect – reaching SARS without any effort – and very difficult to evade. The government can introduce them on a tiny scale to begin with, as thus test their efficacy. Once agreed, revenue for government would be sustained, assured and expanding as long as there were an economy at all.