Debunking the Budget

SA finance minister Pravin Gordhan tabled the budget before parliament on 27 Feb 2013.  In it, he proudly announced that taxes would not be going up and that government would be cutting spending by R10.4 billion.

These statements are not true.  It would perhaps be harsh to call them lies, but they are certainly omissions of the truth.  They’re PR spin at best, and probably qualify as propaganda.

On taxes, the real story is taxes DID increase.  Note this rule: a country running large deficits DOES NOT lower taxes*.  Aside from the closing of various loopholes, clamping down on family trusts for wealth planning purposes, and persistence of the usual meddlesome levies and duties, income taxes on the whole actually increased marginally.

You see taxes are structured on a so called ‘progressive’ basis: the more you earn, the higher your tax rate.  For this to be implementable you have to have defined income tax brackets, which are specific ranges of taxable income that get taxed at set marginal tax rates.  Due to constant price inflation, most salaries perennially drift higher in nominal value while they may stagnate or even fall in real or purchasing power value since all prices are rising.  If the government did not adjust the defined income tax brackets higher each year with inflation, we would find ourselves drifting into higher marginal tax brackets and paying high tax rates on our income.

This year the government has pulled a fast one.  It has adjusted the tax brackets higher by only 3.5%.  Official inflation in South Africa is a little under 6%, and many people, particularly the middle class and poor, are experiencing considerably higher increases in the cost of living of the order of 10%, 15% or even higher.

On a 6% CPI-linked salary increase many people will pay a higher tax rate in 2013 than they did in 2012, and no one will pay a lower tax rate. Ergo, Mr Gordhan raised income taxes.

Research by ETM Analytics shows that if your taxable salary was R250,000 in 2012, and you got an inflation-linked increase of say 6% to R265,000 in 2013, your tax rate has increased and your after-tax income is LOWER in terms of its real purchasing power.

If your cost of living is actually 10% higher this year, then your new after-tax income is about 4% lower.  You got considerably poorer.

This is how the middle class is hollowed out by deceptive fiscal and monetary policy.  This fiscal trick is known as ‘bracket creep’, and it is a stealthy way to raise taxes on the middle class while feeding them happy propaganda that their taxes have not increased.

Next is the issue of the R10.4 billion ‘austerity’.  This is very similar the US sequester austerity ruse.  It is not a cut in spending, but a reduction in planned higher spending the future.  The South African government actually plans on spending about R230 billion MORE in fiscal year 2015/16 than it spent in fiscal 2012/13.  That’s a 26% increase in spending, and it will overrun revenue considerably each year over the next three years (and beyond).

The R10.4 billion ‘cut’, is a cut in a forecast, three years from now, and is certainly not big enough to fall outside standard forecast error.

The R10.4 billion austerity that the press gobbled up hook, line, and sinker could not be more fictitous.  It is a fiddle of the books, but not even of the real books – of the hypthetical books!  It is itself not even an actual cut – spending will RISE, as will South Africa’s national debt.

In fact, since Pravin Gordhan became finance minister, South Africa has gone into R600 billion more debt, and over the next three years could go into another R500bn more.  That’s another R1,1 trillion of debt on your children’s backs that they never asked for and have every right to repudiate and reject.  It is R85,000 of debt for every household, about R140,000 for every person employed in the formal sector, and about R300,000 for every registered income tax payer.

In return SA gets 25% unemployment, a moribund economy, paltry FDI, a weak rand, riots and protests, and growing income inequality.

Thanks Pravin.


*Dubbya’s tax cuts came off the back of a balanced (or roughly balanced)  Clinton era budget and fiscal overconfidence.


About Russell Lamberti

Russell Lamberti is a regular contributor to Mises SA. He is Chief Strategist at ETM Analytics, an Austrian-influenced economic research firm based in Johannesburg. Although he wrties about many topics, you'll most often find him slaying patent and copyright law and exposing the biggest bubble in history: fractional reserve banking.
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