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Injecting a bit of revolutionary heat into our national proceedings

Money can burn a hole in one's pocket, creating irresistible spending urges. Indeed, even when there is no money, spending urges can still be irresistible, thinking overdrafts, access bonds and credit cards.

Then there are those born with holes in their hands, who cannot hang on to money, spending rather than saving.

The latest parlour game coming out of our politics is called 'Spending the Surplus'. The small fiscal surplus has become like a red rag to a bull. The very idea of a surplus enrages when so many are still needy. How does the nation dare save collectively, when the dire needs of so many still go unmet?

Such small surplus is perhaps but an excuse in a far larger and longer running parlour game concerning national priorities.

It potentially pits the interests of the growing working and middle classes (today over half the population, counting 8.5 million formal sector jobs and 4 million urban informal ones on a total labour force of 21 million) against those claiming to represent the poor and indigent, determined to transform society much faster.

The case for state intervention distinguishes between macro and micro objectives.

Micro-economically the state provides regulatory guidance and social goods which can't be effectively supplied by private interests, such as mass education, health care, policing and military protection against foreign intrusions. We do already all of that.

The state also supposedly no longer mobilizes for war (though don't tell it to the big boys). Instead the state mobilizes for redistribution. Besides providing mass public goods, the state also fulfills a welfare function, aiming to constrain extreme income and opportunity inequalities.

For this purpose the state collects taxes, and borrows long-term primarily to invest in infrastructure.

But the state is also a major economic agent in its own right, alongside household consumption, private investment and external trade. Macro-economically, conditions can shape where the state usefully attempts a stabilizing role, optimizing longer-term economic performance.

The two instruments are interest rates managed by an independent central bank and the government's own tax collection and spending.

In the event of loss of confidence, the state can overcome the resulting fall in demand through tax cuts, more state spending and lower interest rates, maintaining the economy?s performance within its supply ability.

But the very opposite can also happen. The economy might become exuberant, through external windfalls or simple overconfidence. Now demand is in danger of overwhelming the economy's supply ability, generating inflation heat and import spillovers creating external financial risks.

For years now we have actually outperformed, exuberant demand straining our national supply engine. Prudently, this has encouraged higher interest rates. The state contribution is to freeze some of its tax windfall rather than spending it all.

Thus a budget surplus has arisen, not because the state under-spends (it grows its expenditure by over 12% annually already for years), but because our overall condition is far too exuberant to be sustainable within our present supply abilities.    

Social activists, however, have other priorities, inclined to more proactively address the plight of the poor. As state activism has potentially no limit, tantalizing options spring to mind.

A fiscal surplus appears as a golden opportunity to do more without supposedly burdening the economy. But if macro stability requirements preclude raiding the surplus, what are the alternatives? Does it become a matter of overall priorities?

This is a far larger argument. Want to build 200 000 additional affordable houses annually (R40bn)? Spent more on AIDS (R20bn)? Can't make room within existing budgets (cutting infrastructure, welfare, policing, military, bureaucracy)?

Would that mean a change of priorities in household consumption (R1300bn)? Fewer frivolous durable goods (plasma screens, top-of-the-line SUVs), less semi-durables (all that fashion), less empty talk (cell phones), less addiction (drink, tobacco, gambling, television)? Fewer haircuts, plastic surgery?

In other words, a duller, less colourful or exciting existence in favour of greater society building?

It can be done. Raise VAT to 17% from 14% now, collecting R30bn in new tax revenue, suppressing consumption without creating disincentive to work. Raise real interest rates and inhibit credit purchases (suppressing another R30bn of expenditure). Voila, there is some resource space, affording us other spending priorities.

Not politically popular? Of course not, otherwise it would have been done a long time ago.

Which makes a fiscal surplus burn such a large hole in the political hand, for it induces daily temptation when surrounded by so many unmet priorities, supposedly serving no visible purpose, except vague stabilizing ones. Yet if we don't stabilize, we invite higher inflation, higher interest rates and slower growth.

That would penalize the poor as much as the working and middle classes. Is that a risk worth running, as compared to accepting established priorities, recognizing resource constraints and still achieving greater social change affordably over time?

Or are we going to impatiently overthrow the established order of priorities, injecting a bit of revolutionary heat into our national proceedings? Who would benefit and who lose out and would that be acceptable?  

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics