South Africa currently finds itself in an unprecedented economic crisis due to the ANC government’s mismanagement and transgressions.
Against this backdrop, the FF Plus has come up with a thorough fiscal policy framework with innovative proposals to get the country’s economy back on track towards prosperity.
According to Dr Pieter Groenewald, leader of the FF Plus, the country’s economic crisis is so extensive that progressive reasoning and actions are needed to stimulate economic growth.
One of the proposals is to establish a Fiscal Commission (FC), which will be similar to institutions in, amongst others, the USA, the Netherlands, Belgium, Austria, Denmark, Canada and Japan.
The task of the FC will be to act as an independent institution that will oversee fiscal policy, similar to how the Reserve Bank currently oversees monetary policy in an independent manner.
In addition, the fundamental principles of the free market system are emphasised because the FF Plus is of the opinion that only a true free market system, without government interference and other related obstacles, can lead to maximum economic development.
The significance of private property rights is also highlighted as it is the cornerstone of the free market system and without it there will be no incentive to trade in South Africa.
Some of the other points discussed in the document are a smaller and more functional government, state institutions that are free of corruption, better policing, education and health care services, a fair tax system and appointments made on merit alone.
According to Dr Groenewald, the FF Plus considers the FC of the utmost importance to ensure that the government’s over expenditure is curtailed in the interest of the tax payer and to ensure that the country is not driven over the fiscal edge.
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FF PLUS FISCAL POLICY (Shortened)
1) Core assumptions
The FF Plus’s fiscal policy is based on the following core assumptions:
a) Only the free market system can fully unlock, create, promote and protect economic value;
b) The free market system recognizes the individual’s nature as a trading being driven by the personal motivation of self-actualisation;
c) The cornerstone of the free market system is private property rights, without which there will be no incentive to trade;
d) The prerequisites for establishing a cycle that creates value are as follows:
i) Small and effective government and public administration;
ii) A free market with little government interference, policing of crime (specifically with regard to the protection of private property rights) and providing quality basic and higher education as well as health care to the disadvantaged;
iii) A fair tax system that does not undermine wealth creation;
iv) An effective public administration with zero tolerance for corruption and effective prosecution of offenders;
v) A fiscal deficit that is, at least, equal to the capital expenditure of the government. That would mean that the government will no longer deplete savings or not save, as is currently the case.
e) Trade entails mutual benefits for the buyer and the seller. Trade also leads to better allocation of scarce resources. Furthermore, trade, production and all economic activities are always aimed at serving the consumer. It is therefore important to put the consumer first and to make trade as free as possible. In addition, an increase in trade will also result in a greater variety of products at lower prices for the consumer. This will, in turn, lead to lower inflation, lower interest rates and ultimately stronger economic growth. Trade is one of the strongest forces that support economic growth and therefore trade must be kept as free as possible by keeping taxes and other related obstacles to a minimum.
2) Fiscal Policy
a) Prerequisites for fair fiscal policy: The effective implementation of a sustainable fiscal policy can only be achieved when the elected government takes the following facts to heart:
i) The government merely acts as the manager of the state by way of a contract – the Constitution – and is ultimately accountable to the citizenry;
ii) Tax revenue belongs to the citizenry and not the government. The government only manages taxes for the state and the state is responsible for collecting tax revenue and appropriating it on behalf of and to the benefit of the citizenry;
iii) Without tax payers, the government would not have the necessary funds for public administration. The government and the state, therefore, have a responsibility not to alienate the tax payer, which would only lead to maximum tax avoidance.
b) Fair Fiscal Policy:
i) Limited government authority: Essentially, the government should only be allowed to exercise authority in matters that are in the public interest and matters that require the state’s ability to act nationally and collectively. Traditionally, there are three core functions where the government is required to exercise authority:
(1) National Defence Force: protecting the citizenry against external threats;
(2) Police: protecting the citizenry against internal threats;
(3) Justice: proper independent legal system and courts for civil and criminal cases
There are also secondary functions that the state can fulfil based on the fact that these are in the public interest and because the state is well positioned to pay attention to these matters on a national level by way of taxes:
(4) Health Care: protecting the poor against health problems. A favourable environment for private health care services needs to be created so that quality and cost-effective services can be rendered. State hospitals and clinics must be managed by private service providers;
(5) Education: providing relevant and good quality basic and higher education in order to create a labour force that can compete internationally in an increasingly globalised world. A favourable environment for private schools and tertiary education needs to be created so that quality and cost-effective education can be provided;
(6) Infrastructure: providing and maintaining public roads, bridges, public transport systems, dams, water systems, railway tracks, electricity distribution systems, etc.;
(7) Social Security: social grants are justified, but the qualification criteria must be such that the state can afford paying the said grants and the criteria must be revised regularly.
ii) Private Initiative: There must be a standing rule that the government and the state may in no way participate in the free market because of the unfair advantage that it has due to its disproportional power, size and policing abilities:
(1) Services: services must be rendered in the free market by businesses that have identified opportunities and that render both private and public services in competition with one another in order to ensure effective and low market-related prices. Public services that can be better rendered by private businesses are, amongst others, the following:
(a) Airlines: a state airline has no right to exist and should only ever exist if initially it exists in the form of a public-private partnership, which is then systematically privatised;
(b) Power Supply: die initial infrastructure for electricity distribution must be provided by the government, but the generation of electricity should be left to competing industries that will compete, by way of innovation, to generate power in a cleaner and more optimal way for distribution and sale by means of the distribution system. That would mean that ESKOM must be dismantled and privatised.
(c) Postal Services: postal services must be fully privatised and a competitive environment must be created against the backdrop of the increased use of electronic communication.
iii) Public Debt:
(1) It is the state’s responsibility to ensure that an environment favourable for the free market is created within which economic growth can take place.
(2) Any deficit in the budget can only be supplemented with debt if the deficit is at least equal to capital expenditure.
c) Proposals for Fiscal Policy:
i) State Expenditure: the government may not spend more than its tax revenue. This will force the government to rather implement policies that will support economic growth.
ii) Personal and Company tax: personal and company tax need to be lowered in order to stimulate investment in the economy and to create jobs.
iii) VAT: VAT must rather be used as a fair instrument. VAT broadens the tax base and VAT is fair because everyone will pay more. On the other side of the social welfare spectrum though, funds will be made available to better provide for social welfare needs.
(1) The government must privatise nearly all public enterprises by means of a mix of partial sale and full sale. SAA and ESKOM are first on the list of enterprises to be privatised.
(2) Public service appointments must be made on merit alone.
(3) Corruption must be eradicated.
(4) The public service must be made smaller and there should be fewer offices of ministry.
(a) The quality of basic education, which currently takes up the greatest part of the budget, must be drastically improved. The department must function more effectively and most of the money should be spent on building more schools, while mother-tongue education must also be promoted.
(b) The management of schools must be outsourced to the private sector with the mandate to support poor learners in order to ensure that they can indeed attend school. Learners must be issued education coupons that they must hand in at the school where they receive their education. The government can then pay the subsidy, for the relevant learners, to the school.
(c) Poor learners must be able to attend school for free. Together with the Department of Social Development and the agricultural industry, the school’s private management must ensure that feeding schemes are implemented.
(d) The trade unions for educators in the basic education environment must be replaced with a conciliation and arbitration system in order to address mass strikes and the lack of discipline amongst educators, specifically in poorer schools where learners require more attention.
(e) Educators that are willing to work in poorer schools must receive higher remuneration. All educators must be eligible for performance bonuses and higher bonuses should be paid to educators working in poorer schools.
(f) In cooperation with various private sector industries, bursaries based on merit and financial need must be made available to learners that perform well. Poor learners, with distinctions in mathematics and science, must be eligible for financial rewards.
v) Fiscal Commission:
A Fiscal Commission (FC), similar to institutions in, amongst others, the USA, the Netherlands, Belgium, Austria, Denmark, Canada and Japan, must be established. The task of the FC will be to act as an independent institution that will oversee fiscal policy, similar to how the Reserve Bank currently oversees monetary policy in an independent manner. The Minister of Finance will not have the authority to interfere with the decisions and functioning of the FC. The FC will be appointed by parliament and will consist of ten experts in the field, five of which will be appointed by the government and five by the opposition parties.
Any extra tax collected will be placed in a sovereign fund to serve as a fiscal cushion for difficult times.
The FC will have the following functions:
(1) The FC will determine the VAT rate and may adjust it according to fiscal need in order to ensure that the government’s fiscal deficit targets are met;
(2) The VAT rate may be adjusted twice in a financial year: with the budget and again with the adjustment budget;
(3) An upward adjustment of the VAT rate will be limited in terms of the following:
(a) The government and public service must remain small and public officials’ salary adjustments may not exceed inflation;
(b) State expenditure for the next five years must mostly be funded by the sale of state enterprises and state assets, like land;
(c) That the economy picks up by protecting the free market, which will increase other tax revenue due to the broader tax base.
vi) The FC will do research and do short-, medium- and long-term fiscal and budget projections.
vii) The FC will do research to determine the cost and other negative implications of existing and proposed policies of the government.
viii) The FC will reflect on decisions regarding VAT and budgets taken in the past in order to better plan for the future.
a) Too much public debt and corruption has led to the collapse of numerous societies. Therefore, drastic steps are needed to reduce debt and to keep the country from being driven over the fiscal edge.
b) The plan, as explicated above, will do more than just reduce debt though. It will also:
i) Stimulate the economy and job creation, which will increase savings and broaden the tax base;
ii) Increase competition, which will result in lower prices and better service delivery in the public and private sectors;
iii) Ensure that the country is well positioned for international trade;
iv) Ensure that there is sufficient tax revenue for a fair and effective budget and it will prevent the need to incur too much debt in order to balance the budget;
v) Ensure that savings are increased by creating a sovereign fund to retain any excess tax money and other savings.