Prudent Fiscal and Monetary Policies will get SA through the Current Crisis

The fiscal and monetary policies of the SA government have cushioned this country to a certain extent from the worst repercussions of the worldwide financial crisis. However, in its efforts to deal with the burden of mass unemployment, the government has chosen to follow the path of least resistance rather than to confront the real issue: it has opted to provide taxpayer-funded welfare to the jobless rather than allow individuals to bargain freely with potential employers on wages and conditions of employment. The government has also been prodded toward other welfare policies that are inimical to economic growth.

One consequence of the trend toward increased welfare policies, an obvious result of political pressure from within the ANC’s tripartite alliance, has been to push government consumption expenditure steadily higher as a percentage of GDP. Tax as a percentage of GDP increased from 32.6% in 2001 to 35.9% in 2008. An increase of 3.3% might not look high but translated into money it means an estimated extra R67.8bn taken from taxpayers in 2008 compared to what they would have paid if taxes had remained at 2001 levels. Theoretically, the percentage of GDP taken in taxes could remain static because, as the size of the economy increases, so does the amount taken in taxes.

Taxes have a seriously negative effect on the ability of entrepreneurs to accumulate capital with which to drive economic growth and create jobs. They also redirect expenditure away from the goods and services that wage earners want towards the things that government decides to spend their tax money on. High taxes also act as a deterrent to the attraction of foreign capital and a disincentive to enterprise.

In addition to the visible taxes taken from the people, government also imposes an invisible tax on savers and creditors in the form of money supply inflation. For instance, SA’s notes and coins in circulation increased from R2.04bn in December 1980 to R72.70bn in December 2008, a 3,464% increase in 28 years. One of the consequences of this currency inflation is that the exchange rate of the rand declined from about R1.00 to US$0.77 to its current rate of about R8.50 to US$1.00, a decline that would have been greater if the quantity of US dollars had not also been inflated by 608% during the same period. It is pleasing to note from the latest money supply figures that SA’s rate of currency inflation has moderated.

A new study from Canada’s Fraser Institute shows that the average Canadian family spends nearly half its total income on taxes, more than it spends on food, clothing, and shelter. The Canadian Consumer Tax Index 2009 shows that even though the income of the average Canadian family has increased significantly since 1961, their total tax bill has increased at a much higher rate. In 2008, the average Canadian family earned an income of $71,764 and paid total taxes equalling $31,535 – 43.9 per cent of its income. In 1961, the average Canadian family earned an income of $5,000 and paid $1,675 in total taxes – 33.5 per cent of its income.
“Canadian families have seen their total tax bill increase by an astounding 1,783 per cent over the past 47 years,” said Niels Veldhuis, the study’s co-author and the Institute’s director of fiscal studies.

Canada’s Tax Freedom Day is calculated to fall on about 10 June this year. The concept of Tax Freedom Day was developed to illustrate how much of the calendar year members of an average family spend in working to pay their taxes and how much time they have left in which to earn income to cover all their other family expenses, and, if at all possible, to save a little money. The study shows that Canadian families are, year-by-year, losing more of their hard-earned money to taxes. Last year, SA’s Tax Freedom Day fell on 12 May. The announcement of the 2009 Tax Freedom Day is therefore imminent.
Creeping taxation and the notion that citizens are mere tax-cattle has become pervasive worldwide. There is likely to be a backlash and politicians will do well to heed the signs. Governments could function at much lower cost. Core functions of government, such as defence, law courts, policing, and foreign relations cost a surprisingly low 10% to 12% of GDP, the greater part of the rest of expenditure is dispensable. In times of economic crisis, such as we are currently experiencing, governments should consider drastically reducing the tax burden on their citizens to allow savings to accumulate and capital investment to occur.

Far from being a crisis of capitalism or free markets, the current world crisis is a consequence of excessive government expenditure and fiat money creation. People switch from saving to spending when they believe that government is devaluing their money by currency inflation. They also switch from solid investment in the production of goods and services to speculation, a tendency that increases when individuals conclude that they are being excessively taxed.

Moderation and prudence on the part of governments are the answers to financial crises, recessions, and depressions. Wild currency inflation will not overcome the problems resulting from previous currency inflation. Our government has been a model of prudence by comparison with the governments of SA’s major trading partners. The incoming government would do well to pursue a similar course, perhaps becoming even more prudent rather than less, by, for instance, providing the rand with 100% gold backing.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 28 April 2009

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