The 2020 Budget is approaching and by all accounts, we are likely to witness an embarrassing display of a policy with no answers. We have chosen to be popular. We have chosen to “trash capital”.
Let me give you an idea of the knock-on effects when you decide to “trash capital”. What we are doing in South Africa at the macroeconomic level is the equivalent of students burning down libraries because they are unhappy with education policy. For those of you, close to national accounts and budgets, bear with me, I have rounded and dumbed down the numbers to make it easier to understand.
First some concepts:
A Nations’s capital includes the land, the buildings, the stock, the financial assets. In the case of South Africa about R 25 Trillion. GDP is the total amount of our turnover – our output in South Africa is about R4,5 Trn. The Capital/Output ratio is the amount of capital required to generate a certain output, in South Africa about 5 to 1. The employed labor force is directly associated with the GDP and capital, in the case of South Africa about 15 million people. The tax collected in South Africa is directly related to GDP, around 26%.
So working it backward in South Africa if we want to keep our new youth entering the market at the rate of 500,000 per year and we wish to keep a growing portfolio of social services, we need to increase GDP by around 5% per year or increase capital by about R 1 Trn a year. The simplest way to do that is to have a rising property market that creates a tide that lifts all ships. The richest countries own the most valuable properties. The most fluid working capital flows are underscored by property.
Government can fiddle a bit but you cannot really escape these numbers. More jobs require more capital. Less capital available means fewer jobs. Lower GDP, means less tax less money for social services, more burning of libraries. These are not iron clad ratios like gravity or the melting point of water, but they are certainly strong forces that cannot be ignored.
Now take the situation where our President Cyril Rhamaphosa, his Finance Minister Tito Mboweni and the economic cluster – including his advisory panel of esteemed economists, take a “Trump- First” style approach to Expropriation Without Compensation. Understand that all these politicians and all these esteemed economists really, really like their jobs and the trappings and status that come with it. In South Africa, it is very unpopular to speak out against EWC. I can understand this from people that do not understand economics, but for people who do, the silence goes beyond cowardice and lands squarely in the lap of narrow short-sighted self -interest.
Go through the numbers:
The ANC calls for Expropriation without Compensation and the President, Finance Minister, and the esteemed economists, toyi-toyi along with the masses. The crowds love the beat and elect them for another term. No one bothers to notice that the property market drops by 20% and wipes over R1,5 Trn off our Capital base. No one wants to connect the dots that this causes a drop of GDP of over R 300 Bn and Job losses north of one 1 Million Jobs! No one can figure out why tax targets come in R 100 Million lower. No one figures out why SOEs are failing. Duh?
A man cannot understand a logical argument when his wages depend on not understanding it. The dancing continues and lunch is served to the guests – its avo and prawns. Cocktails follow and more dancing. Outside it is getting darker.
The fastest way (instantaneous – can happen before the end of February) to inject R 1,5 Trn into the South African Economy is to revoke EWC!
Wait – you actually have to do more – you have to give assurances to the landowners that this was a mistake and that it is good and safe to invest in South Africa. Bring your capital onshore, build your warehouses and factories and fill them with stock. Plant blueberries, avo and olive seeds that will only yield crops in five years’ time. Drill new mine shafts. Build dams on your farms, you can keep the water. Assure the landowners that if they are successful we will not overtax them. Commit to dropping the Tax to GDP ratio. The profits will always be theirs and they will have a Government that will guarantee this. Then take the R 100 Bn increased taxes that will certainly follow and use that to buy land for the poor using tried and tested market mechanisms.
The land Issue is very important. Trashing capital does not solve it. It does exactly the opposite, it destroys land value and burns the libraries.
President Rhamaphosa, Tito Mboweni and every one of those esteemed economists that take their paychecks this month, should be ashamed for putting their short term self-interest before what is good for South Africa – popular or not.
Article by Philip Copeman
#copeman academy Tito Mboweni Mzwanele Nyhontso