Twenty-Twenty Fiscal Update
With the new year now in full swing, many of us are busy streamlining our admin and getting our financial ducks in a row.
Part of this process requires keeping abreast of new developments in governance and the financial services sector and making tough decisions for our families and fortunes. Rand Rescue takes a look at some of the latest economic news from South Africa.
Important dates for SA economy
The South African Reserve Bank held the first of six scheduled general policy meetings this week to discuss crucial economic matters and decide on important policy changes.
The latest meeting and decisions announced by the SARB are both the first for 2020 and the last for the 2019 fiscal year, which concludes on 29 February 2020. The budget speech is scheduled for late February with further SARB policy meetings scheduled for:
- 17 – 19 March 2020
- 19 – 21 May 2020
- 21 – 23 July 2020
- 15 – 17 September 2020, and
- 17 – 19 November 2020
Other important updates and announcements to watch out for include:
- 30 January: M3 Money Supply YoY and Private Sector Credit (YoY) consensus
- 31 January: Balance of Trade (Dec 2019)
- 6 February: SACCI Business Confidence (Jan)
- 7 February: Foreign Exchange Reserves (Jan)
- 11 February: Unemployment rate (2019 Q4), Manufacturing Production (YoY & MoM)
- 12 February: Unemployment (2019 Q4), Retail Sales (YoY & MoM)
And for saffas living abroad, 1 March marks D-day for the implementation of expat tax updates which we have covered at length in the past year.
Lethargic growth for SA
In its Monetary Policy Committee statement this week, the Reserve Bank noted minor improvements in economic indicators, paired with equal concern over geo-political developments worldwide.
Indices showed lower inflation since the third quarter of 2019 and forecasts have been cut for 2020 and 2021 by 0.1% per year, but it should be noted that the forecast also points towards a 0.1% decrease over a five-year period, from 5% to 4.9%.
The most decisive cut relates to South Africa’s growth. The initial projections for SA’s 2019 GDP growth stood at 1.5%, but such abismal growth was far more optimistic than the actual 0.4% growth it had attained. And this growth was down by 50% from 0.8% in 2018. For 2020, SARB cut the forecast by 0.2% on previous forecasts to 1.2%.
While consumers and some businesses may be happy with the drop in inflation, most forget that a healthy economy requires a stable increase in consumer pricing. Goods are expected to become marginally more expensive as an economy grows. Of course, many government banks address the problem through the same means employed by the SARB – by cutting interest rates. Such rate-cutting is generally aimed at stimulating economic growth. The theory is that when lending is eased, funding is freed up for businesses to invest and that the economy would thereby receive a boost.
The 25 basis point drop announced by the Reserve bank this week is an indication of its dedication to balancing South Africa’s economic growth. What’s problematic about this scenario is the downfall, as is currently unfolding in the United States.
In 2019, the Trump administration urged the Federal Reserve to cut the interest rates, which the Fed obliged. However, in 2018, corporate taxation had also been cut – from 35% to 21%. This is the exact initiative undertaken by South Africa in 2013, when corporate tax rates were cut from 34.55 % to 28%. In theory, such a decision is aimed at boosting a trickle-down economy. The government assumes that lowering corporate tax and interest would encourage businesses to invest in innovation and human capital while settling outstanding debt with freed up funds. The reality paints a different picture. For although such changes in lending and taxation hold theoretic value, deciding factors in the success of such initiativesa are business and consumer sentiment. Historical data has shown that such undertakings only ever work where businesses have a positive outlook for the country, trust in governance and are willing to take on the risk of investing in human resources and new innovations. Furthermore, where such positive sentiment lacks, businesses use the excess cash freed up by interest rate and tax cuts to buy back their own shares – keeping funds circulating within a business silo.
The chart above shows South Africa’s economic growth over the past decade, compared to the corporate taxation rates over the same period below.
Compare this to SA’s inflation over a 19-year period from 2010, and it is clear that monetary policy changes have not benefited the country in the way SARB and SARS had foreseen.
In fact, South Africa’s economy had been most stable up until the worldwide recession in 2009, with inflation peaking at 11.21% and a corporate tax rate of 34.55%. Of course one cannot take these numbers in isolation. The recession had knocked economies worldwide and at the same time South Africa’s leadership was handed over from President Thabo Mbeki to Kgalema Mothlante before being swiftly surrendered to Jacob Zuma in 2009. We were handed a raw deal.
What these numbers do show us in the context of the economy’s links to politics, is that the decisions made to salvage South Africa’s economy have hardly been accurate or beneficial. If anything, it seems the likes of Gordhan and Mboweni have battled with the difficult task of simply keeping the economy afloat without making much headway. In such an economic and political climate, drastic measures to overhaul a country in financial dire straits are quite impossible to manage.
If such impossible tasks as mentioned above aren’t enough, South Africa has been struggling to release its limbs from the suction of widespread corruption and maladministration festering within the cores of its State Owned Enterprises (SOEs). Maladministration is a quicksand which holds us fast to our course of non-growth.
Though finally ridding itself of a presidency whose means and methods had been blatantly unethical and illegal in 2018, the damage had already been done. A slow decline in public perception, investor sentiment and growth paired with ghastly service delivery, an appalling deficit and crumbling public infrastructure had placed the government, Reserve Bank and SARB in a dilemma for which there is no swift answer.
Tax Statistics SA noted in 2019 that, “In the last few years, SA’s economy has significantly underperformed. Economic growth has lagged behind global and emerging markets, real GDP has grown slower than population growth for five consecutive years and our current GDP performance on a per capita basis is the weakest since the 1960s.”
In short, policy has not managed to rectify what had already gone wrong.
Sentiment – the deciding factor
Research conducted by the United States Economic Forum found an interesting trend with regards to GDP growth and leadership. Since World War II, GDP growth in the USA had been a starking 1.9% more per year under democratic leadership compared to republican leadership.
The researchers compared everything from fiscal policy to presidential speeches and found one interesting indicator for economic success – positive sentiment.
The growth had little to do with economic or party policy, but it relied heavily on the sentiments of business, public and foreigners towards its leadership. Time and again, when leaders shifted their voices towards exclusion, nationalism and preserving their country through embargoes, tightening up immigration, raising tariffs to foreign investors or buyers and disinvesting in social and environmental efforts, the economy would see a knock as industries, businesses and individuals disinvested their own time, money and efforts in their own country. The abstract concept of positive outlook and empathy for mankind seems a strange phenomena in the world of economics where everything seems to hinge on fiscal policy, and yet it made all the difference.
It seems the majority of citizens and businesses feel that when they are treated fairly, they are obliged to act fairly in turn – they tend to invest in their fellow humans and to support business when their entire industry and market acts in a similar fashion.
In fact, research conducted by Dr. Bruce Perry and Maia Szalavitz, authors of Born for Love: Why Empathy is Essential and Endangered, points out exactly why such political systems and economies work – we are hard-wired for cooperation and care as humans. Psychologically, humans have an innate propensity for caring for the herd. It is an evolutionary trait which has seen us survive against all odds in a world where we had not initially been the apex predators. Our cooperation and philanthropy benefits the survival of the species. The research is further supported by Yuval Noah Harari’s Sapiens, a New York Times Bestseller, which postulates that homo sapiens’ success came about as a result of our language which spurned abstract concepts like religion and economy. But the work also points out that such concepts could be our very undoing – for the more we cast away our tendencies for empathy, the more we marginalise others. There are those who use the concept of camaraderie to segregate. And as we do so, our successes become less about survival of the species and more about empowering isolated structures. Though many of these structures survive purely due to power play, the inevitable outcome is a fragmented society where humans are removed from participation and unlikely to invest. And as a sentient species, such behaviour is counterintuitive and detrimental to the entire civilisation’s survival and long-term growth. As the research shows. Even the most affluent in society withhold their investment when they feel that the government doesn’t care.
Backtrack to 1994 in South Africa’s history, and one can see that the abstraction is not so absurd. For although the country had been in existential turmoil, it was also united behind a singular vision and a deliberate message from its leadership – that things would be better, that we all had a stake in it, and that we should all hope and contribute to the hope of others.
Such a remarkable impact of public enterprise is currently beating down the dilapidated house of SA’s economy as more and more South Africans are jumping ship. In fact, South Africa is on the verge of tax revolt, with fewer and fewer individuals bothering to file their taxes at all.
An unhealthy balance
Tax cuts and amendments are, of course, not a bad thing. It is necessary to give relief and reprieve if the cuts benefit society as a whole. But it’s important for the powers that be to address changes correctly and at the right time.
Consider that corporate tax rates were cut to 28% from 2012, and then keep in mind that the entire burden of personal income tax had been taken up by a mere 3% of South Africa’s population in the past few years. Those taking the brunt of our economy with regards to taxation earn between R200 000 and R750 000 per annum and pay 45% tax on their personal income – far lower than corporations do. Consider then that those who earn the most generally do not file personal income tax. The people who earn the most usually don’t earn salaries, and earn their income from investments.
In South Africa, Capital Gains Tax is still far lower than personal income tax – between 18.6% and 40%. This is a worldwide phenomenon which favours the elite, and places the burden of a country’s economy on the middle and higher-middle class. Such unequal taxation has been criticised in the UK and USA as well, where the weight of the respective economies seems to be carried by those who still hold a vested interest in employment – the ones who work for a living and start businesses. The most calamitous outcome is that individuals in these tax brackets – for good reason – become conservative with human capital investment and take their money and business out of the country.
Unfortunately, such an exit is often viewed by lower income earners as an abandonment by business. It is too often painted as an ‘easy out’ – the fact that some have the capacity to move their money, business and also make a physical move elsewhere. The reality is simply that it is unfeasible for a country’s welfare to lie entirely on the shoulders of one class.
Sadly, placing the burden of South Africa’s economy on the shoulders of those who have the capacity for making a difference is where it all goes pear-shaped. Between corporate governance and regulatory bodies the country has failed at implementing the correct measures to grow our economy.
Take a look at the VAT increase of 2019, which was aimed at increasing revenue. Though total VAT collection had increased year-on-year from 2018 to 2019, 20% of the increase had been attributed to a backlog in VAT claims and indices show that household and small business expenditure had taken a hard knock from VAT increases while company contributions to SARS decreased from 27% to 16.6% in the past decade. To add insult to injury, South African business announced that only 24% of companies who’d submitted returns in 2019 had been profitable.
The SARB touted the Rand’s appreciation against the US dollar as a badge of honour this week, but had neglected to contextualise the marginal win. In fact, at the height of the worldwide economic recession, the rand had seen a R9.93 exchange rate to the dollar. As with the purported positive outlook regarding inflation, one needs to put the numbers in perspective. A better exchange rate is beneficial in some respects, but as our foreign investors like the USA and UK struggle with internal policy.
We also need to consider our balance sheet. Our past income had relied heavily on mineral exports, and yet South Africa’s mining industry has all but imploded. Year-on-Year, Gold production had plummeted by 1.4% and overall mining production is down by 1.25%, according to Trading Economics. Our current services imports stand at R239-billion compared to R230-billion exports BoP, and our exports are dropping rapidly. This, of course, points towards another economic problem – our consumption outweighs our production.
Given the corporate and SOE bailouts on the cards and the fact that Eskom’s new CEO has not managed to clean up the power utility’s spending and mismanagement yet, a relief for SA consumers is not likely for the near future.
Making an exit
As is clear in this article, many South Africans don’t jump ship due to an unwarranted negative outlook, but simply because it is the most practical thing to do. Blame is often placed on such individuals who still have breathing room to choose growth – the ones who can leave. But such battle lines drawn between, lower, lower-middle and upper-middle income groups are hyperbolic and neglect the most telling issues – the moral absence and economic neglect of governance. In an ideal world, those who have more will indeed be empowered to give more to their country and contribute to society as responsible citizens, but the answer to SA’s problems is hardly the slow implosion of responsible and respectable businesses and individuals.
It remains a sensitive issue for those who choose to leave. The responsibilities weigh heavy, the feelings of desperation and guilt at choosing self-preservation burdens us. Most South Africans have an endless longing not to leave, or to return home one day. And perhaps this will be an option someday. But for now, the solution may be going where the grass is greener and assisting your crumbling home from afar. But also choosing a future for yourself and your family which has a better and brighter forecast. There are no guarantees, but one can certainly calculate probabilities.
If you want to make this move abroad, feel free to leave your details below, and Rand Rescue will contact you to discuss your personal circumstance and needs.