South Africa’s government destroys R100 billion a year

South African taxpayers bear a double burden: ordinary tax payments and the state’s destruction of capital to the tune of R100 billion a year. 

This destroyed capital and economic value has resulted in the state borrowing heavily over the past 15 years, with very little to show for it. 

Ultimately, Efficient Group chief economist Dawie Roodt said taxpayers are responsible for this pile of debt, as their tax contributions will pay it down. 

Roodt told the 9th BizNews Conference that the South African state is the biggest destroyer of capital in the economy. 

This stems from historic financial mismanagement since the replacement of Trevor Manuel as Finance Minister in 2009. That year, South Africa ran a full budget surplus. 

Since then, the government has consistently run a full budget deficit, turning to debt to plug budget gaps and fund extravagant policy plans. 

Roodt explained that it is fine for the state to run budget deficits and raise debt if it is used to invest in the economy and ultimately translates into faster growth. 

This investment can come in the form of infrastructure development, improvements in service delivery, and enhanced state capacity. 

However, in South Africa, the money was not used for these purposes, and the country’s economy stagnated. 

“The state has systematically destroyed capital in South Africa. It is the biggest destroyer of capital in the country,” Roodt said. 

“They borrow long-term money and spend it on short-term current expenditure, such as salaries or grants, rather than investment.” 

“The amount of money that is destroyed like that is R100 billion to R200 billion a year. Not only are we overtaxed, but a lot of our tax money is destroyed.” 

This creates a double burden for South African taxpayers as they will have to make up for the destruction of capital at some point in the future. 

Taxpayers will make up for it directly through higher taxes or through declining service delivery as the state cuts its spending. 

South Africans are currently experiencing both in the form of fiscal consolidation. The state is reducing its spending, and capital is being destroyed through mismanagement. 

The new state capture

Roodt explained that much of the capital destruction occurs within the civil service, whose wage bill accounts for a significant share of state revenue. 

South Africa’s civil servants have enjoyed a decade of above-inflation salary increases and promotions, resulting in a top-heavy and bloated workforce. 

This workforce is often incapable of delivering services efficiently and effectively, and is a net drain on the economy. 

Roodt described the bloated civil service as a new form of state capture through bureaucracy, with an unaffordable wage bill. 

“We have got new state capture in South Africa. This comes from civil servants, including politicians, of course, and tenderpreneurs,” Roodt said. 

Roodt estimated that South Africa’s two million civil servants represent 3% of the population, but consume 17% of the country’s GDP through wages. 

“This is the elephant in the room that is draining the fiscus and the economy. We cannot keep on paying the civil servants,” Roodt said. 

“Taxpayers will not stand for it anymore. But no politician has been brave enough to say they will cut civil servants’ salaries. In the end, the market will do it for you.” 

Roodt explained that as spending on wages consumes a greater share of the budget and government debt rises, the bond market will hold the state to account. 

If the situation deteriorates further, the cost of borrowing will rise to a point where the state will be forced to make significant budget cuts or face financial ruin. 

Roodt made it clear that a large share of civil servants provide value for South Africans, but the issue is that, as a collective, they fail to deliver on their mandate. 

“I am not saying that all civil servants are overpaid and underworked. Of course, there are many of them that are overworked and underpaid,” Roodt said. 

“But, the civil servants are there in the first instance to serve me and to protect me and my stuff. They are there ot make it easy for me to do business. That is certainly not what we get from the state and civil servants.”