How much is inequality increased by regressive taxation and government spending? (We don’t know, but let’s please ask.)

19 April by Patrick Bond

CC - Flickr - David Stanley

‘You have to look at both the taxing and the spending sides of government policy – and, on that basis, South Africa can claim to have one of the world’s most redistributive public purses.’ This argument, made by Business Day associate editor Hilary Joffe (2015), draws on three 2014-15 World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.
research papers and presentations (Inchauste et al 2014, Inchauste et al 2015, World Bank 2014), and reiterated in the Mail&Guardian (2015) and at Econ 3x3 in October 2015 under the title: ‘How much is inequality reduced by progressive taxation and government spending?’ (Woolard et al 2015). |1| The answer is clear: from a 0.77 Gini Coefficient measuring income inequality,adjusting ‘comprehensively’ for state revenue and expenditure lowers the Gini to 0.59. Servaas van der Berg’s (2009) estimates for the fall are even larger: from 0.69 to 0.47.


But there are two problems: first, the Bank and van der Berg research cannot be considered ‘comprehensive’, for countervailing data are simply ignored; and second, nevertheless, a variety of neoliberal commentators, including economists who should know better, regularly regurgitate this wild claim in the course of their own transparent efforts to promote fiscal austerity. And judging by the Econ3x3 version of the claim, my own attempts (Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. 2014a-c, Bond 2015a) to get to the bottom of the methodology and number crunching have been utterly futile, for they are also ignored. If Econ3x3 is to foster debate and raise the standard of rigour of the South African economics discipline, more effort is necessary, because the research on this vital matter published so far is not only sub-standard due to incompleteness, but is politically biased in a way that has already probably increased inequality in the world’s most unequal large country.

The political economy of the capitalist state

To begin, what must we do to properly frame the thorny question of whether state taxation and spending are progressive or regressive? The main roles for a state in modern societies like South Africa are not only the minimal necessary functions for reproducing capitalism: assuring legal contracts are honoured, facilitating exchange through a well-functioning monetary system and maintaining a monopoly of violence.

As David Harvey’s (1985) diagrammatic representation of ‘three circuits of capital’ shows (Figure 1), there are also a wide variety of other activities that ensure the market system generates surpluses at the point of production, in the primary circuit of capital.

States also typically provide financing and regulation of the secondary circuit: managing the built environment and lubricating financial markets. It is in the tertiary circuit that state regulation is most obvious: levels of taxation are established, science and technology are subsidised, the security forces are funded, and the labour force is renewed by judicious spending on the quantities and capacities of workers available for the market in large part through education, health, welfare and ideological inputs.

Figure 1: The state within modern capitalism’s three circuits

PNG - 99.1 kb
Source: David Harvey (1985)

To answer the question posed in the title properly, we must consider all the functions of the state in the analysis, including those that directly benefit capital. Simply consider the US/European/Japanese Quantitative Easing and other post-2008 bail-out strategies (worth many trillions of dollars); is evident that only a relatively small fraction of the world’s state spending and financing (including loan guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). ) is directed towards social welfare. It is the Bank’s (and van der Berg’s) failure to incorporate a genuinely comprehensive view of such bias within state fiscal, monetary, security and social policy that fatally undermines the recent Bank (2014: v) study study and its claim that South Africa has achieved a ‘sizable reduction in poverty and inequality through its fiscal tools.’

The fiscal tools examined by Inchoaste et al were only those related to social spending and municipal services, and even there the researchers made assumptions that in the South African context are highly dubious. To be sure, the Bank’s staff and consultants were compelled to admit data and methodological ‘limitations’:

But without addressing these kinds of drawbacks in the Bank’s analysis, it is impossible to declare that ‘Not only are South Africa’s main fiscal instruments progressive overall, the degree and structure of progressiveness is such that these instruments achieve significant reductions in income inequality’ (Woolard et al 2015: 7). As one reflection of how dubious the alleged social spending benefits are for recipients, the country’s single largest budgetary commitment is to education. Yet like access to most municipal services (e.g. rubbish collection which occurs regularly in mainly white neighbourhoods, but rarely if at all in the shack settlements that house a third of a typical city’s residents), extreme quality differentiation results not only from racial apartheid but from ongoing segregatory processes associated with market-related residential locations. Most public schools produce an extremely low-quality education. The World Economic Forum’s (2015) Global Competitiveness Report 2015-16 rated South African education as the worst of 140 countries in terms of science and mathematics training, and 138th in overall quality.

If education spending is meant to be a proxy for human capital investment (in terms of Bank logic), in many cases the result is better considered disinvestment. As Nicholas Spaull (2013) remarked after studying 1994-2011 outcomes,

  • with the exception of a wealthy minority, most South African pupils cannot read, write and compute at grade-appropriate levels, with large proportions being functionally illiterate and innumerate. As far as educational outcomes, South Africa has the worst education system of all middle-income countries that participate in cross-national assessments of educational achievement.

The wealthy minority’s public schools are sufficiently funded and produce extremely good education in part because of top-up systems in which parents contribute further funds. |2| So it could just as easily be argued that inequality is amplified (not mitigated) by the tokenistic manner in which public education is provided to the low-income majority. This is not really a controversial assertion, even if ignored by Bank researchers. As even Andrew Donaldson (2014b) of the South African Treasury acknowledges, ‘In areas such as education, health care and urban transport, service provision tends to evolve in differentiated ways… the result is a fragmented, unequal structure in which the allocation of resources and the quality of services diverge.’ Combined with semiprivatised systems, such public spending, he admits, ‘entrenches inequality between rich and poor.’

This story is fairly typical of maldistributed state resources. Many of the largest spending categories are even more biased to supporting corporations, such as the Presidential Infrastructure Coordinating Commission’s proposed Strategic Investment Projects (e.g. the first two – a coal export line from Limpopo to Richards Bay and the South Durban Dig-Out Port, the two largest, costing tens of billions of dollars). Their asset valuations are increased through geographic advantage: proximity to statesupplied roads, ports, bridges, rail lines, and the like. Such infrastructure investment in turn adds to the explicit capital base owned by their shareholders, a form of deferred income that Bank researchers should attempt to quantify just as they do the implicit deferred income that they assume is the outcome of education spending.

As the Bank study’s influence grew, I emailed its main consultant, Nora Lustig (2015), to ask why more accurate assessments of the state’s pro-corporate fiscal beneficiaries were not attempted, so as to offset the extreme bias generated by only incorporating social spending. Her reply: ‘Your questions are very valid. Regretfully, we have yet to figure out a solid methodological approach to allocate the burden/benefit to households of the list of interventions you list.’

Table 1: South Africa’s state spending, 2014-19

In the October 2015 medium-term budget, from $89 billion in the next year’s anticipated spending, $13.2 billion (15%) is allocated to public education subsidies (where differential quality is the main caveat). The next largest spending categories include $12.2 billion for ‘Economic affairs’ (especially economic infrastructure), $11.5 billion for housing and municipal infrastructure (including local-level facilities that support businesses and wealthier residents), $11.1 billion for ‘Defence, public order and safety’ (with their strong upward class biases), $10.2 billion for public health (whose merit-good disease-control benefits are vital to wealthier citizens), and $8.2 billion for debt servicing. In the latter category, financiers and other bondholders are the main beneficiaries of South Africa’s ever higher interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, resulting in projected debt payments rising faster than any other spending outlay (10.9% annually) over the coming three years.

When World Bank researchers consider such a budget, the biases above are apparently impossible for them to contemplate: a class-analytic approach to crony capitalism, to state corporatist policies and to outright corruption of the public purse on behalf of wealthy beneficiaries is beyond Bank researchers’ comprehension. A dozen years ago, the same blindness characterised earlier work by van der Berg, in spite of tough methodological critique by Neva Makgetla (2003). Yet notwithstanding my attempts to raise what Lustig admits are ‘very valid’ doubts regarding the work’s value neutrality (Bond 2014a-c), Bank researchers repeated the claims about South Africa’s ‘highly redistributive’ state spending a year later (Woolard et al 2015).

Examples of regressive state spending

Although the World Bank (2014: 21) claims to ‘comprehensively assess the distributional impact of government taxation and spending,’ neither its researchers nor van der Berg (a regular consultant to the Treasury Department) made any effort to calculate state subsidies to capital (‘corporate welfare’). Such subsidies were enormous because most of the economic infrastructure created through taxation and user fees – roads and other transport, industrial districts, the world’s cheapest electricity during most of the post-apartheid era, R&D subsidies – overwhelmingly benefits capital and its shareholders, as do many tax loopholes. For example, infrastructure mega-projects such as the Medupi and Kusile power plants come in the form of highly-subsidised grants whose benefits mainly go to construction companies and subsequent corporate users (i.e., not in the form of direct ongoing income transfers) in the Energy Intensive Users Group (three dozen companies that consume around 45% of national electricity). Like many such subjective valuation estimates (e.g. education and healthcare investment), if the Bank and van der Berg wanted, such corporate-biased infrastructure could be valorised, conceptually, as a contribution to corporate wealth – not as explicit income but as implicit contributions to ‘produced capital’ (as education and health investments are for ‘human capital’) – for those who hold shares in such corporations.

Likewise, the South African government’s deregulatory attitude to transnational corporate profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. expatriation has, since 1995, allowed a great deal of implicit income to flow to the firms’ overseas financial headquarters, much more than is officially recorded in corporate and national accounts. Global Financial Integrity (2015) estimates the 2004-2013 annual outflows at $21 billion, including one year (2007) when they reached 23% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(Ashman et al 2010). In other words, this extent of tax laxity – turning a blind eye to creative accounting by multinational corporations – is one of the most important redistributive aspects of fiscal policy, but gets no mention.

Another factor that could have been incorporated to assess whether state fiscal policy favours the wealthy as opposed to the (long-term) interests of the vast poor population of South Africa is natural capital accounting. Although still at an early stage, other Bank (2011) staff have done what is probably the most sophisticated analysis of nonrenewable resource depletion associated with corporate extraction of South African minerals. This accounting shows that in a sample year (2005), the impact of the country’s natural capital shrinkage on gross national income was negative 9% (World Bank 2011: 193) and the overall net resulting shrinkage of South Africans’ per capita wealth was $245 per person. This extent of redistribution can also be said to be an implicit decision of South African fiscal policy: not to tax minerals wealth (e.g. as happens through sovereign wealth funds such as exist in Norway, Alaska and other places) and instead to allow the proceeds of non-renewable resource depletion to go to wealthier shareholders. In short, these are ways that fiscal space could be said to exist in principal, but was evacuated by Treasury officials.

When it comes to state service provision at household level, there are similar biases. As the late 1990s prices of water and electricity soared, by 2003, the country’s leading water official, Mike Muller (2004) admitted that ‘275,000 of all households attributed [water supply] interruptions to cut-offs for non-payment,’ which extrapolates to in excess of 1.5 million people affected that year alone. The Municipal Services Project estimated that 10 million people lost services from 1994-2001 (McDonald and Pape 2002: 22). Of these, 60% were not reconnected within six weeks, according to municipalities’ ‘Project Viability’ reports during the late 1990s (Bond 2000: 359), indicating that poverty was primarily to blame and not the so-called ‘culture of nonpayment’ that those now in power alleged as a negative legacy from the days of antiapartheid activism (Bond 2002). The highest disconnection rate was for fixed telephone lines, where, of 13 million people connected for the first time, 10 million were cut by 2000, as prices per call soared. This was due to the partial privatisation of state phone company Telkom that resulted in the demise of internal cross-subsidies, as the new Texan and Malaysian investors attempted to maximise profits at the expense of poorcustomer retention during the late 1990s (Bond 2014d).

As another reflection of commercialisation and commodification processes, the 1998 national electricity policy called for the parastatal agency Eskom to apply ‘costreflective’ pricing policies, which meant much higher charges for poor people, especially those who during the 1980s and early 1990s had fought successfully for a nominal township service fee: then a $3 ‘fixed charge.’ But the fee rose drastically by the early 2010s when much higher prices and volumetric metering applied (Bond 2012: 188). In contrast, recognising how vital it was to provide cheap electricity and water, the 1994 Reconstruction and Development Programme (the ANC’s campaign platform) had endorsed the progressive principle of cross-subsidisation, which imposed a block tariff that was meant to increase substantially for higher-volume consumers. This redistributive approach would have consciously distorted the relationship of cost to price and hence sent economically ‘inefficient’ pricing signals to consumers. Such signals should have meant that poor people could consume more essential services (for the sake of gender equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. , health and economic side benefits), while rich people and big businesses would embrace conservation (and hence environmental protection) by cutting back on their hedonistic consumption levels, thanks to much higher prices.

Neoliberal critics of progressive block tariffs insisted that such distortions of market logic would introduce a disincentive to supply low-volume users; their assumption is that the whole point of public utility supply is to make profits or at least to break even in narrow cost-recovery terms. In advocating against the proposal for a free lifeline and a rising block tariff, a leading World Bank expert (Roome 1995: 51) advised the first democratic water minister, Kader Asmal, that privatisation contracts ‘would be much harder to establish’ if poor consumers had the expectation of getting something for nothing. If consumers weren’t paying, the advisor argued, South African authorities required a ‘credible threat of cutting service.’ To that end, new technologies for disciplining poor people also emerged in this period, as Greg Ruiters (2007: 195) found: ‘The prepaid system in telephones, electricity and increasingly water has clearly become a state “civilising” tool for the marketised political “management” of the ungovernable poor.’

These approaches foiled a genuinely redistributive strategy. Not even the next water minister, the vocal communist revolutionary Ronnie Kasrils, could fulfill his (heartfelt) commitment to implement a free basic water policy. Indeed Kasrils’ high-profile promise in early 2000 led the authors of the World Bank’s (2000: Annex 2, 3) Sourcebook on Community Driven Development in the Africa Region to recommend a typical neoliberal policy for pricing water: ‘Work is still needed with political leaders in some national governments to move away from the concept of free water for all.’ In 1999, the Bank had claimed that the water advisor’s 1995 pricing recommendations were ‘instrumental in facilitating a radical revision in South Africa’s approach to bulk water management’ (World Bank 1999: Annex C, 5), and also to Asmal’s revision away from the 1994 Reconstruction and Development Programme ‘lifeline’ water supply mandate (Bond and Khosa 1999).

By the time that mandate was finally honoured by Kasrils, the commercialisation instinct was already thoroughly accepted by municipalities. As a result, the right to water ended up either being sabotaged or delivered in a tokenistic way, i.e., free for merely the first 6 kiloliters/household/month (kl/hh/m). To illustrate, in Durban – the main site of Free Basic Water pilot-exploration starting in 1998 – the overall cost of water ended up doubling for poor households because of a huge price increase in the second bloc (the city soon had the second-highest price amongst its South African peers for 6-10 kl/hh/m). For poor people, this led to consumption cuts by a third in the subsequent six years, from 22 kl/hh/m to 15 (Bond 2010: 456). Matters were even worse in rural areas, where extremely serious problems arose in the community water supply projects, and the main reasons for unsustainability of a water system invariably included genuine affordability constraints (Hemson 2003).

What really shaped South African wealth redistribution since 1994

Let us be frank about what happened to South Africa’s welfare state over the past quarter century. The extension of the apartheid-era social policy – which had been limited to white, ‘Indian’ and ‘coloured’ South Africans – was pursued in a manner that stressed ‘width not depth’ and that fell far short of potential resource allocation. Social policy and state services suffered cut-backs in financial ambition – e.g. the Lund Commission’s 26% reduction in the main child support grant in 1996 (from $37 to $27/month) – even while many more people gained access. The number of South Africans receiving monthly grants soared from fewer than 3 million in 1994 to 17 million two decades later (out of 55 million residents). But measured in late-2015 exchange rates (following substantial currency depreciation), monthly grants were just $22/month for supporting each poor child under age 18, 60% lower than the World Bank’s ($1.88/day) poverty line. In addition, there was an $83/month pension for retirees over 60 years old and the disabled. In all cases, these were means-tested (only available to those with less than $213/month income), although the Treasury promised to shift to universal access for old-age pensions, as a strategy to avoid distorting savings incentives for elderly people (that move was repeatedly delayed). Ironically, however, social grants spending was less progressive – i.e. less directed to the poorest South Africans – in 2006 than in 1995, by quite substantial amounts, according to Servaas van der Berg’s (2009) modeling. Using a -1 value as the most progressive outcome in which all spending benefits the poorest, and +1 the most regressive, van der Berg found a progressivity shift for social grants worsening from -0.371 in 2000 to -0.359 in 2006 (Van der Berg 2009: 12).

As a result, after the first decade of liberation – from 1995 to 2005 – the slight positive impact of these grants and other social policies were unable to offset the general income deterioration that accompanied neoliberal economic policies. University of Cape Town researchers found that African households lost 1.8% of their overall income (including wages, salaries, and unearned income), whereas white households gained 40.5% (Bhorat et al 2009: 8). A 2010 report of the Organisation for Economic Cooperation and Development by a team led by Murray Leibbrandt concluded that since 1994, ‘poverty incidence barely changed in rural areas, while it increased in urban areas’ (Leibbrandt et al 2010: 37). In 2012, those under the $43 ‘national poverty line’ numbered 47%, up from an inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. -adjusted 1994 level in which 45.6% were poor, according to Haroon Bhorat (2013). A February 2015 update of the poverty line by Statistics South Africa (2015), drawing on 2011 data and with a line of $52/month in late 2015, estimated the poverty rate to be 53%. (This report was ignored by Woolard et al 2015). During the same period, the ratio of surplus in the economy given to labour versus that taken by business (ie wages to profits) shrunk by 5%, so not just the poor but the formal working class were victims of the neoliberal era (Forslund 2012). In contrast, by all accounts, market income inequality rose (to what the World Bank in 2014 measured as a Gini coefficient of 0.77) and so did unemployment: the official rate soared from 16 to 25% from 1994-2015, and adding those who gave up looking for jobs brought the rate to 35% (Bond 2014c).

At the same time, extremely high increases in fees for consuming basic state services began to kick in by the late 1990s. As a result of rising social protest and the 2000 municipal election campaign, the early 2000s witnessed a municipal Free Basic Services programme. But this too was tokenistic, insofar as cities such as Durban (the pilot municipality) doubled the overall price of water from 1997-2004 while offering a meagre 6 kilolitres per month per household free. With the second bloc of consumption soaring in price, the results were higher non-payment rates, higher disconnection levels and a third less consumption of water by Durban’s poorest million residents (Bond 2010: 456-7).

The irony is that during this era, there were vast surpluses that were allowed to escape social control. The country’s ‘natural capital’ rose, as the commodity price index soared from 2002-11, leaving South Africa with the world’s greatest mineral resource endowment, valued at peak by Citi Group at $2.5 trillion (Mala 2012). But because of lax regulation, the mainly foreign-owned mines and smelters were stripped, with the Washington NGO Global Financial Integrity (2015) naming South Africa the country seventh most prone to Illicit Financial Flows in 2015, with an average of nearly $21 billion in annual losses over the prior decade. This propensity to misinvoice, transfer price or simply evade taxes was one reason that Johannesburg’s commercial elite was in 2014 considered the most corrupt corporate class on earth according to the business consultancy PricewaterhouseCoopers. Drawing on its survey, The Sunday Times labeled South African management ‘the world leader in money-laundering, bribery and corruption, procurement fraud, asset misappropriation, and cybercrime’, with 77% of all internal fraud committed by senior and middle management (Hosken 2014, FM Fox 2014). All this may help explain SA’s 2013 rating as the third most profitable country for corporations among major economies, according to the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(2013), although with the commodity price crash that obviously has changed dramatically since.

Austerity politics flowing from biased economics

Beyond the fatal flaws in measurement bias, the main problem following from the World Bank research on South African inequality is its political bias: it promotes the agenda of the most regressive fractions of capital (financiers) and their most articulate spokespersons. Here are just four examples of how the Bank’s research has been used and abused (there are many others provided in Bond 2015a):

  • - Investec Bank chief economist Brian Kantor (2014): ‘The World Bank shows, in a recent study, that SA does more to redistribute income in cash and kind to the poor than its developing economy peers… The imposition of higher tax rates on the high income earners would achieve little by way of extra collections; more important it would undermine the incentives of high income earners to deliver more taxable income.’
  • - BrandSouthAfrica manager Simon Barber (2014) in the journal Foreign Policy: ‘The World Bank recently compared 12 middle income economies and found SA had performed the best in reducing poverty and inequality. That said… ‘the fiscal space to spend more to achieve even greater redistribution is extremely limited’… choices will have to be made between expanding the politically important safety net which now protects 16 million plus South Africans and making the investments needed to clear blockages to the one thing that’s required above all, growth.’
  • - Neoliberal commentator Jonathan Katzenellenbogen (2014) at PoliticsWeb: ‘a World Bank report warned last week that government no longer has the cash to expand the grant system... ‘due to the high fiscal deficit and debt.’ According to the Bank report, transfers have caused the poverty rate to fall from 46.2% to 39%... This reduction in inequality through tax and spending is larger than in any other country.’
  • - Rothschilds banker (and former finance and planning minister) Trevor Manuel (2014): ‘The World Bank study released last week confirms that fiscal policy is significantly redistributive, on both the tax and spending sides...’

This cacophony culminated on Budget Day 2015 with the country’s highest-profile economist, Iraj Abedian, warning of imminent credit rating agency Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness.  This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security.  Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due.  Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc.  A rating of BB or below is considered a ‘junk bond’ because it is likely to default.  Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness.  The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s :
downgrades to junk status, and making a prominent call to avoid this outcome, by cutting social grants ‘way below inflation’ (Ensor 2015). The tone for this early version of austerity was partly set by the World Bank. Even after cuts in the social wage were made in February 2015, Woolard et al (2015: 8) remarked, ‘South Africa’s fiscal deficit and debt indicators signal that there is limited fiscal scope to spend more to achieve even greater redistribution.’

Could South Africa’s Treasury spend more on genuinely redistributive services? In relative terms, Pretoria’s capacity to serve its citizenry steadily shrunk in comparison to the size of the economy, for across the terrain of social and public policy, government’s ‘general services’ role in GDP rose from 16.2% in 1994 to 17.3% in 1998, but fell back to 15.8% by 2002 and 13.7% in 2012. Reflecting the cost-recovery approach to service delivery and hence the inability of the state to properly roll out and maintain these functions, the category of GDP components termed ‘electricity, gas and water’ declined steadily from 3.5% to 2.4% to 1.8% of GDP from 1994 to 2002 to 2012. The cutbacks were not due to the elimination of fraud and waste; instead, the state was underspending in general, compared to peers. The 2010 internal gross public debt of South Africa was less than 40% of GDP, well below high-performance countries Malaysia, Brazil, Argentina and Thailand, and was rising relatively slowly (Barclays Capital 2012).

So on the one hand, were there political will (not the cynical stinginess exhibited by a succession of finance ministers), state fiscal support for the social wage was not terribly difficult to raise in absolute and relative terms. This was partially attempted, but in a tokenistic way, by broadening the inherited, formerly racially-delineated social programmes like the child grant and pension, to include all South Africans. The expansion entailed a fiscal commitment that was actually quite limited, with state social spending never exceeding a 3% increase in GDP beyond 1994 levels. As the Financial and Fiscal Commission (2011) reported, even dating to 1983, social transfers rose from just 1.8 to 4.5% of GDP through 2007, and as a result, ‘Post-1994 expansion of the grants system has not threatened fiscal sustainability.’ From an inherited budget deficit of -7.3% in 1993, the Treasury shrunk the deficit and even achieved a primary budget surplus of more than 1% by 2008, before the subsequent economic meltdown forced a renewal of (moderate) deficit spending. However, the sum of state social spending by the South African government was so limited that in relation to GDP, only four out of the world’s forty largest economies had a lower ratio (South Korea, Mexico, China and India – all of which had much lower Gini coefficients) (Organisation for Economic Cooperation and Development 2011).


If South Africa’s inequality is shocking, so too are the lengths that some economists, journalists and politicians go to cover it up and, on that basis, amplify this scourge. Treasury’s long-standing second-in-command official, Andrew Donaldson (2014b), observed in November 2014, ‘A greater redistribution effort could be achieved by raising the value of social grants or by extending their coverage.’ Yet in February and October 2015 Finance Minister Nhlanhla Nene both deigned to extend the grants, and indeed following Abedian’s firm advice and the rating agencies’ threat, he cut their real value. At the same time, Nene simultaneously deregulated exchange controls, allowing rich South Africans to increase their offshore wealth expatriation from $267,000 to $667,000 per person per year (Bond 2015b).

Then on 21 October 2015, with thousands of university student protesters milling outside his parliamentary mid-term budget speech in Cape Town, demanding a 0% nominal rise in 2016 tuition increases, Nene (2015: 10) described their protests as ‘not constructive.’ Nene (2015: 9) also claimed that the value of the 2015 Older Persons and Disability grant increases from $87/month to $92/month and the Child Support Grant from $20 to $21 (both 4.8% on a pro-rata basis) was ‘in line with long-term inflation.’ But much evidence was already mounting of rising food price inflation (given the severe drought), transport inflation (through a declining currency and hence petrol price increases) and energy inflation (through Eskom tariff hikes) which would put the Consumer Price Index rate for low-income people far higher.

Treasury did not bother deconstructing inflation along class lines, and nor is such a figure available from Statistics South Africa. Treasury thus intensified income inequality. Yet according to Donaldson (2014a), in Econ 3x3, ‘inequality may weaken the prospects of rapid and sustained economic growth. This is an awkward finding for countries like South Africa, where the level of inequality is very high.’ Awkward though it was, bearing the growth goal in mind, he concluded,

  • The policy challenge is not to find the right trade-off between growth and redistribution, but to identify and design the specific policies and interventions that support inclusive, faster growth – in the context of a country’s economic structure, its labour market features and institutional dynamics.

To achieve faster growth, Donaldson (2014a, 2014b) promotes the Presidency’s 2012 National Development Plan (NDP), which was coordinated by Trevor Manuel until 2014 when his former deputy National Planning Commission chair, Cyril Ramaphosa – formerly a coal mining tycoon until selling his shares in 2013 – took over in his new function as Deputy President. A full critique of the NDP by trade unionist Neil Coleman (2013) is highly recommended, but recall that the NDP’s two most substantial spending interventions are the mega-projects mentioned above: a railroad expansion and new locomotives that prioritise coal exports (hence amplifying climate change even while the price of coal has crashed 60% since 2011 peaks thus requiring high volume increases to retain income levels), and a Dig-Out Port projected to raise capacity for container handling through Durban from recent annual levels of 2.5 million to 20 million units by 2040 (yet no one in the shipping industry believes this either possible or desirable given massive overcapacity in the industry and a dramatic slow-down in world trade).

If either or both inequality and growth are truly sought, it should be evident that the NDP needs to be reconceptualised to change – not amplify – what Donaldson (2014a) accepts as the ‘context’: the country’s neo-apartheid economic structure, its migrant labour market features and its institutional biases. A brief summary of the ‘context’ was offered by Moeletsi Mbeki (2011) and bears repeating:

  • - The economy has a strong built-in dependence on cheap labour;
  • - It has a strong built-in dependence on the exploitation of primary resources;
  • - It is strongly unfavourable to the development of skills in our general population;
  • - It has a strong bias towards importing technology and economic solutions; and
  • - It promotes inequality between citizens by creating a large, marginalised underclass.

Attacking this context and reconceptualising the NDP are obviously far beyond Donaldson’s mandate, but the need for ‘radical economic transformation’ (as African National Congress rhetoric suggests) should allow genuinely redistributive policies to be, at least, debated. Without doing so, and instead cutting the real value of grants to poor black South Africans and allowing much faster capital flight by rich whites while generously subsidising corporations in myriad ways, the Treasury demonstrates to the society just how self-destructive the existing neoliberal biases have become. To help reverse these policies, the persistent tendency of World Bank researchers to disguise this reality should come to an end, and they should be encouraged, nay compelled, to address the comprehensive ways that inequality is intensified by state revenue and spending policies.

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|1| The economists in question are Ingrid Woolard and Rebecca Metz, University of Cape Town; Gabriela Inchauste, World Bank; Nora Lustig, Tulane University; Mashekwa Maboshe, University of Cape Town; and Catriona Purfield, World Bank. They are all very bright people, but apparently they have a blind spot. Once again, I ask them to think seriously about the fatal flaws in their methods as well as the political implications of their argument, and rework their research with these in mind.

|2| My daughter is at Parkview Junior School in Johannesburg and nearby, my son attended King Edward School. Both receive state subsidies, but the semi-privatised manner in which these funds allow inequality to intensify in South Africa suggests, at least anecdotally, that such educational structuring is vital to the society’s broader system of class reproduction.


Patrick Bond

professor at the University of KwaZulu-Natal, South Africa, where he has directed the Centre for Civil Society since 2004. His research interests include political economy, environment, social policy, and geopolitics.



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