Scepticism has been the overwhelming response to government’s ambitious new growth and job creation targets. Government has failed to meet similar targets before, so why should it be any different this time?

The Growth, Employment & Redistribution strategy, introduced in 1996, envisioned SA attaining a growth rate of 6% and creating 400000 employment opportunities by 2000, neither of which materialised. It was followed by the Accelerated & Shared Growth Initiative for SA , which also promised a 6% growth rate. Now the New Growth Path is aiming for 7% growth and 5m new jobs in 10 years.

But even if SA grows at its potential of 4% for the next three years, it will only just make up the jobs lost during the recession. It seems inevitable that the latest targets will also be missed.

“Government won’t create the millions of jobs required by making mild tilts to policy,” says Investment Solutions chief strategist Chris Hart. “SA faces a national emergency. Radical shifts are required.”

He suggests taxes on savings and investment be eliminated so as to put money back into households and businesses “since entrepreneurial activity is the source of all wealth creation”.

The idea is to shift the tax burden so that if you invest in the economy you save money but if you go shopping it costs more. This means raising consumption taxes like Vat while eliminating things like capital gains tax, transfer duties and taxes on interest earned.

The long-term trend in SA runs the other way. Government is drawing an increasing amount away from the private, productive side of the economy and redirecting it towards consumption. Tax revenue has climbed from 22% of GDP in 1994 to over 25% in 2010/2011. By 2013/2014 it is set to be over 26%, assuming there are no changes to tax policy. But with National Health Insurance (NHI) looming, higher taxes are inevitable.

Numerous studies show government expenditure is not as efficient in generating economic growth as spending by the private sector. Given that economic growth is SA’s number one priority, and given government’s stated acceptance that private enterprise drives growth and job creation, the growing transfer of resources from the private to the public sector makes little sense. It makes even less sense when government is admittedly inefficient.

Though the New Growth Path acknowledges the lack of capacity in the civil service , it presses ahead with allocating an active and dominating role in the economy to the state.

Not only is SA shifting too many resources from the private to the public sector but within government, too much is being spent on consumption as opposed to investment. Public servants’ salaries now account for 40% of consolidated noninterest expenditure.

Treasury concedes that wage pressures, higher interest payments and social grants are together growing so fast that they are sapping government’s ability to maintain the pace of capital spending.

The bottom line, according to Hart, is that as long as government continues to divert more resources away from the production side of the economy, it will fail to generate sufficient jobs.

Nedbank chief economist Dennis Dykes counters that while there is no doubt that in the long term strong, sustainable growth in fixed investment is highly important, it’s not going to be the big job generator in the short term. For that, you need to generate demand .

Business invests in response to two main motivators: evidence of sustained, stronger growth and evidence it is running out of capacity. Neither is prevalent now.

Dykes also blames policy uncertainty for the private sector’s reluctance to invest, especially in sectors like mining and agriculture, where pronouncements on nationalisation and worries over new security of tenure legislation have business running for the hills.

And yet, government believes business is going to rush into fixed investment and job creation activities. Treasury has a history of being vainly optimistic about the pace of fixed investment. Last February, it forecast that gross fixed capital formation for 2009 would come in at 4%. The actual number was -2,2%. This year, it is forecasting almost 4% growth after a contraction of 3,6% last year.

“The big problem is that business is being given sweets for engaging in certain job-creating activity — like the R5bn youth employment subsidy, extension to learnerships and tax breaks for manufacturing investment. At the same time other departments are whacking it over the head, promising that if it creates jobs, it’s going to be severely punished,” explains Dykes. He cites the prospect of “Orwellian” amendments to labour legislation as an example of “the big stick” approach.

In addition, government is contemplating using a payroll tax (paid by employers) to fund NHI. The message to business is: don’t hire, because it’s going to cost you.

“Government has to decide if the private sector is an ally or an enemy,” says Dykes. “At the moment, the private sector is like a deer caught in headlights. You just can’t expect it to invest or create jobs in such a threatening environment.”

So what else would economists like to see government do to get job creation going? For many, it is to go back to basics. “Complex, ambitious programmes will not succeed until government has resolved the basic problems in the education system, primary health care, infrastructure (including maintenance), democratic institutions and the creation of a culture of entrepreneurship,” says Sanlam group economist Jac Laubscher. Dykes agrees.

Hart has some imaginative suggestions. He would like to see mining firms be given tax breaks for buying locally made capital goods, arguing that this could stimulate local manufacturing of heavy equipment that is currently imported. Creating a metals exchange in Johannesburg is another idea which could generate jobs, he says.

“Both these examples would be easy for the mines to participate in, as opposed to something like diamond cutting, which is what is traditionally thought of as beneficiation.”

Article courtesy of Financial Mail – please click here to see original article