THE African National Congress (ANC) is debating economic policy as part of a continuing assessment of whether South Africa is becoming more equitable, its citizens less impoverished, and unemployment reduced. The good news is that South Africans are less impoverished than they were in 1994, a situation that has also improved equality of living conditions.
The hard data show South Africa has seen household spending rise to R1,2-trillion on a similar rise in disposable income as more people fall into the formal economic net. Indeed, after-tax income is now estimated at R24490 a person, well up from 1994's R17320. As all these figures are in real terms, the distorting effect of inflation has been removed, showing that South Africans have become better off on average. But averages can be misleading and too many remain in poverty.
However, the sharp rise in incomes has allowed tax revenue to double in South Africa (in real terms), from about R260bn in 1994-95 to R472bn in 2011-12. This has allowed the government to dramatically expand the social welfare net to 16-million people directly through monthly monetary grants. Together with basic service provision, this has lifted many out of abject poverty, although substantially more needs to be done.
Monthly monetary transfers (social grants) amount to R280 each for 11-million children and R1200 a person for 4-million disabled people and pensioners, totalling R104bn a year. There has also been a sharp improvement in living standards or significantly higher individual ownership of goods and use of services for most South Africans since 1994. Living standard measures (LSMs) range from ownership of a radio (the lowest category, LSM 1) to the additional ownership of a stove and running water (LSM 2) to additional ownership of a TV and use of electricity (LSM 3) and, in LSM 4, ownership of a fridge and hi-fi and the use of a flush toilet as well. Clearly the government's roll-out of services (electricity, sanitation, piped water, education, healthcare and housing) over the past 18 years has pulled many into a significantly higher standard of living than in 1994, along with the welfare grants. Only 500000 adults remained in LSM 1 (no electricity, running water or flush toilets) last year compared with more than 4-million in 1994. About 10-million fell into LSM 6 last year from 3-million in 1994. LSM 6 includes the goods and services of LSMs 1-4 as well as the use of cellphones and purchases of lottery tickets, magazines and books.
The poor (incomes of less than R2750 a month) have become better off under the ANC's tenure on the provision of basic services and direct monetary transfers. The working class (incomes can be estimated between R2750 and R7590 a month) has also benefited from subsidised services.
The sharp reduction in inequality between living standards since 1994 should render income inequality less pivotal in the debate as it is the quality of life that ultimately counts. Nevertheless, for those surviving on only a few thousand rand a month, with numerous dependants to support, the progress is clearly still not enough. This dissatisfaction is intensified when inadequate, or a failure in, service delivery occurs. It is also why wastage and inefficiency in the expenditure of government finances affects the poor the most and why corruption cannot be tolerated to any degree.
The migration of 6,4-million individuals out of the lowest living standard measures is essentially also a migration out of the lowest income categories (less than R2050 a month). These individuals now fall into LSM s 4-6, where incomes range from about R3000 to R6500 a month and the standards of living are considerably more dignified for many. While there is still a considerable gap in income equality, there has nevertheless been some reduction in both inequality and poverty since 1994.
The doubling in consumer spending, to last year's R1,2-trillion from R0,6bn in 1994, has partly been driven by higher incomes as a result of social grants and the provision of basic services in the low-income to low-emerging-middle-income categories (less than R7590 a month), with this social wage freeing up income from other sources and time. In particular, substantial expansion has occurred in the largest category of consumer spending, nondurables (food, beverages, water, power etc).
The further roll-out of social delivery (with substantially improved quality in some areas) means this upward trend in income and living standards should persist.
For the middle class (incomes between R7600 and R43200 a month), countercyclical government spending (job creation and significant real salary increases) has created a proliferation of increasingly well-paid public servants, with the resulting higher consumption driving gross domestic product (GDP) growth (household consumption accounts for two-thirds of growth). And the lack of broad-based black economic empowerment has seen the creation instead of an elite, high-income consumer. Job creation has flourished in the retail industries.
The government has repeatedly warned that should its revenue collection not meet its spending needs, taxes will be raised. While some recognise this is a shortsighted policy (likely reducing spending and hence growth and future incomes), South Africa's social delivery cannot be substantially scaled back either, without a likely fatal backlash from voters. About 57% of government expenditure last year was on the provision of the social wage (total social services), well up from 49% in 2001-02. This proportion will grow further, although the government says not as rapidly. Nevertheless, the latest Budget Review shows that 0,6% of the population pays 37,2% of the country's income tax. These individuals earn more than R50000 a month (before tax).
While incomes are growing, so are the government's commitments, with interest payments on debt now the fastest growing item in the budget as the government is in the process of increasing its debt from 30% to 40% of GDP.
Three things need to be noted in respect of the valid concern that consumption is exceeding production. First, the acceleration in household (private-sector) spending has, to a significant degree, been an outcome of greatly increased government expenditure, from the social wage to public service remuneration (the fastest growth in retail spending is in the lower income categories), which has allowed the recipients to considerably increase consumption in total.
Second, incomes have risen and the private sector's balance sheet has strengthened considerably since 1994 (net wealth in the private sector stood at R3,5-trillion last year from R1,8-trillion in 1992 in real terms), which has driven consumption. This has also been a result of the fact that growth begets growth, as GDP has expanded by 3,3% a year during the ANC's tenure and only 1,6% a year in the previous 18-year period.
Third, it is the expansion of incomes, or wealth, that has boosted taxes and allowed the social expenditure.
Government finances are experiencing fatigue from the demands placed on them, but taxpayers are also fatigued by rising indirect taxes from considerably higher electricity and water tariffs and the doubling of rates and taxes in many areas, as well as higher (undercounted) inflation. Increasing spending on social services will significantly further raise the fatigue; not doing so will mean further dissatisfaction. It is better to reduce wastage and inefficiencies.
. Bishop is with Investec Group Economics.