The new dominant class, and how they will squeeze you yet again

An interesting article by Dawie Roodt.  “It’s budget time again and economists and analysts are expected to say what they think the minister of finance will announce in his speech. This is also a time when economists get the opportunity to “advise” on all things fiscal: taxes, state spending, borrowing, debt, key ratios and mysterious things designated by incomprehensible acronyms. So here I go; but first some context. 

Lest we forget, the state is there to serve the people. But civil servants (a contradiction) and their bosses, the politicians, have morphed into a social class of their own. Especially since World War II, a new phenomenon has emerged: the rise of the career bureaucrat and the professional politician.

Much of this happened because of the ideas of influential thinkers. Of these thinkers, one individual stands out, John Maynard Keynes. Without going into too much detail, his main thesis was that economies often experience insufficient demand. Under such circumstances, it is acceptable for “governments” (states) to boost demand (spend more). Since then it has become mainstream for governments to get actively involved in the economy, not in providing goods and services as such, but to emphasise and augment demand.

And they took to their new role with gusto. State spending ballooned, creating the ideal breeding ground for rent seekers; the career bureaucrat and the professional politician (another contradiction). Governments dramatically increased in size and so too did the tax burden and state debt.

Today “governments” are by far the most important economic force in just about all countries of the world and consequently, the productive sector – the private sector – carries a massive and rising tax burden. In fact, I think that the Trump- and Brexit phenomenon (and more shocks are likely this year) is partly because people now recognise the new “uber” class for what it is – a suppressive force that imposes an unsustainable tax burden – and the people are getting restless.

South Africa is no different. The relative size of the state has increased massively in recent decades. “The state”, of course, is much more than just what the minister of finance is going to talk about in the budget. The state also includes the provinces, local authorities and the parastatals. In fact, the new ruling class has become so interventionist that the definition of “the state” must be extended, for the state now regulates all our economic, social and normal day-to-day activities. The state is everywhere! And to add to this burden, the professional politician and career bureaucrat make sure that they rule, regulate and dominate our lives at just about every level while also ensuring that they get handsomely remunerated. The result is that most civil servants are hopelessly under-worked and overpaid. Compared to the productive sector, civil servants are on average approximately 40% better remunerated than their equivalents. Keep in mind that the risk of working in the private sector is significantly higher than working for the state – a private sector firm can go bankrupt, the state can’t. That is the reason why “companies” like SAA, Eskom, PetroSA and many more parastatals are so terribly managed. They can’t go bankrupt and they know the productive sector will keep on funding them because their compatriots, the career politician, will see to that. That is also why the service of the civil service is so inferior.

Ironically, these same parastatals have a desire to be part of the productive sector. They pretend to be real companies. They are “companies” with “boards”, “chairpersons” and “directors”, and they have a “shareholder” that often “converts” loans into “equity”. But we all know that they are part of the state and should be categorised somewhere as a sub-division in one or other state department. But once the taxpayer is again required to pay for their incompetence, and all pretence of being companies and businesses are suddenly forgotten as parastatals cite “strategic reasons”, “job creation”, “transformation” to explain their failures and to justify why they should not be treated as real businesses and be required to face the reality that the productive sector always faces; responsibility for their own actions!

The state and its dependents have become the new god we all must serve. Just imagine telling SARS that I refuse to stand in a queue! They take my money and force me to go to them when it suits them and force me to stand in a queue and force me to talk to a rude civil servant! The arrogance! Or another example: I must apply for an ID, passport, this and that license and what is more, I have to over-pay them and then apply! I don’t apply when I pay a salary, I instruct! This nicely illustrates the total arrogance of the system that often gets otherwise decent people to treat us the way they do.

What saddens me about our current situation is that some well-respected economists actually argue that the state should increase taxes because, so they argue, higher taxes are better than a possible downgrade. The degree of public admiration for Pravin Gordhan is also anomalous. Sure, he’s probably one of the best we have but it was under his watch, during his first stint as minister of finance, that we saw a huge increase in state spending and an explosion in the ranks of the ineptocracy. I know there were “valid reasons”: the great recession, a collapse in commodity prices, “job creation” and more reasons like that, but the fact remains that state finance became unsustainable under the watch of Gordhan.

And now we will see more tax increases! The priority should rather be to cut back on the kleptocracy but no, we will keep on feeding the monster and tax the productive sector even more. Just as long as the state chokes more from the taxpayer, the new dominant class grows.

So where is the new assault likely to come from? Obviously the “rich” will have to pay more but the reality is that there are so few rich people and there is very little scope to extract even more tax revenue from the productive. Yet chances are good that we may see an increase in the marginal rate of personal income tax as well as a below inflation adjustment for the other higher income brackets. Also, expect some other “wealth” taxes: estate duties, capital gains tax and a myriad other taxes on transactions and economic activities. But this will not be enough to satisfy the insatiable appetite of the state.

Furthermore, expect a hefty increase in the fuel levy and other arrogant taxes where politicians tell us what we can drink, smoke or sniff. And new taxes, like the tax on fat people, the sugar tax. Obviously, it is for our own good not to eat so much sugar and Gordhan only has your health in mind when he decides what is good for you; the same caring government that has just been implicated in the death of nearly a hundred mentally ill patients!

VAT is unlikely to be increased, it would be politically too risky.

An appropriate budget for our circumstances should rather be one that does the opposite of what I expect. One that unburdens the productive sector of
excessive taxes, controls and bureaucracy.

So, there you have it. Expect more taxes, more state spending and more inefficiency. Expect more arrogance, interference and regulations.

What is to be done? I am not much for patriotism, a term often misused by politicians to justify support for the new elite. But if you want to be patriotic, pay as little tax as is legally possible. One rand in your pocket is worth much more than the same rand in the state coffins. To better paraphrase a well-known quotation: do not ask what you can do for your country, ask what your country can do for you!”

Dawie Roodt
Chief Economist of the Efficient Group