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The revenue riddle: Why economics is everyone’s business

The Finance Minister is due to present South Africa’s medium-term budget next week.

In the run up to his budget speech, Pravin Gordhan has cautioned that the country needs higher economic growth in order to collect the revenue needed to cover South Africa’s expenditure.

The paradox is that many of the conditions responsible for South Africa’s sluggish growth are exacerbated by budgetary constraints. In other words, South Africa needs to spend more to grow, but it needs to grow to spend more.

Growing the tax base

South Africa has an alarmingly small tax base. According to 2013 SARB statistics, fewer than 5% of the labour force paid more than 50% of all income tax.

The meaning of that statistic can easily be misunderstood. For example, commentators on social media sometimes interpret the small tax base as evidence that only a tiny minority of the population is responsible for the growth of the country’s economy. In reality, the small tax base is evidence of the enormous concentration of the nation’s wealth amongst relatively few people.

Cleaners, security guards, and farm workers are essential to South Africa’s economy; they don’t pay much tax because they don’t earn much money.

The small tax base is a problem for the obvious reason that we need to collect more money so government can invest more into growing the economy. But it’s also a problem because we urgently need more consumers to drive demand for the goods and services our growing economy would be expected to supply.

So how do we grow the tax base? That’s where the paradox really begins to bite.

We need education

Many of South Africa’s economic troubles are out of our control. There’s not much the government can do about falling commodity prices and a reduced global appetite for investment.

But there are other areas in which policy and expenditure is more effective. For example, South Africa has a serious shortage of skills, which in turn reduces employment.

Spending more on education is surely a priority. A better educated the workforce could mean lower unemployment and better paying jobs, which would translate into more people paying the a higher rate of tax, which would mean more money is available to invest in education. These skilled workers would also have more disposable income, boosting economic growth, which in turns grows the tax base. It’s a virtuous cycle.

Unfortunately, the opposite is also true. The skills shortage and resulting chronic unemployment is one of the very reasons South Africa’s revenue shortfall is so biting.

In turn, unemployment and dissatisfaction can lead to instability, which can undermine investor confidence, which in turn depresses the economy and reduces revenue. The current unrest at South Africa’s universities is a case in point.  

Looking at the big picture

The above sketch is a simplified account of the way various features of our economy might affect each other. The key point is that any economy is deeply interconnected and extremely and complex. It is a mistake to attempt to explain any single phenomenon in isolation. We need to think systemically.

That sounds like a job for experts only, but in fact, the real world consequences of poor fiscal policy affect us all in direct, often dramatic, ways. 

When we think of good citizenship, we might think of memorising the words to the national anthem or learning what’s in the constitution. Surely, as democratic citizens, we have a much stronger duty to understand our country’s economic fundamentals and take part in a national conversation about our economic direction. After all, the economy is far too important to be left to economists.