Fiscal policy has a direct impact on the financial well-being of all South Africans. The way in which state finances are managed affects the quality of public services received, how consumer savings are protected, and overall peace of mind about financial prosperity. In a sound and healthy environment, financial wellness is achieved when people have full control of their personal finances, have the ability to withstand an unpredictable financial shock, have clear financial goals with a high likelihood of attaining them, and have the financial liberty to make choices to live fulfilled lives.
One of the primary goals of fiscal policy is to increase the certainty that financial wellness can be achieved. For those not able to earn an income once they reach their retirement age, fiscal policy can provide the assurance they will receive their life-long savings accumulated throughout their working lives.
Our research shows that only 6% of South Africans retire comfortably. Most workers arrive in retirement without enough savings for their needs. Instead, most retire with burdensome debt, huge aspirations that fuel additional expenditure (renovating a house, for example), and much diminished overall financial health.
Financial wellness is deteriorating, worsened by the rising levels of unemployment and household indebtedness so typical in SA today
Of particular importance is the fact that the country’s financial system, which host consumer savings, is dependent on how the Finance Minister collects taxes and re-allocates resources back into the economy. This determines whether savings grow or deteriorate in value. Many South Africans have expressed anxiety about their economic futures due to the high turnover of finance ministers at the National Treasury in the past two years.
The upcoming medium-term budget policy statement provides an opportunity to allay citizens’ fears about the security of their wealth and protection of their retirement savings, and demonstrate that the prudent fiscal path followed since 1994 is still intact. The statement comes amid a context of sustained anaemic economic growth, low consumer and business confidence, and a global economy struggling to get back to pre-2008 GDP growth levels.
This will be Finance Minister Malusi Gigaba’s maiden budget speech. He needs to demonstrate how he will secure the financial well-being of all South Africans who find themselves burdened by the tax hikes of the past three years.
The tax burden in SA — as measured by the ratio of tax revenue to GDP — is about 26%. Although not as lofty as seen in other Brics countries — Russia is at 35% and Brazil 33% — and also not as high as some developed countries, the burden of tax goes beyond this statistical measure. Given the high cost of education and private security for households, and rising administered prices (especially on fuel and electricity), the tax burden is increasingly weighing down South African consumers.
Financial wellness is deteriorating, worsened by the rising levels of unemployment and household indebtedness so typical in SA today. Although wage growth in the public sector, the country’s largest employer, has kept pace with inflation, thus improving the spending power of consumers, the state of their financial health is questionable. As a result, reports are increasing about people resigning from jobs to access their long-term savings to fund short-term needs.
Despite the high direct and indirect tax burden, it is clear Gigaba will be faced with declining tax revenues from personal income tax, VAT, and corporate taxes, while also having to continue providing a lifeline to state-owned enterprises (SOEs), which continue to drain the fiscus. In response to the possible revenue shortfall, which is estimated to run close to R40bn, the following revenue raising measures are likely to be taken:
1. Petrol does not attract VAT at the moment, but is likely to be introduced on fuel, which could increase the petrol price by more than a full rand per litre.
2. Electronic services, such as cloud computing and online transactions, [are[ to attract VAT (Uber rides could be effected, for example).
3. Additional wealth-related taxes (perhaps a luxury tax).
4. A reduction in medical tax credits.
5. Allowing the effects of inflation to be felt by the consumers.
Although these initiatives will not, in themselves at this stage, prove to be the last straw for individuals’ financial well-being, they will definitely increase the tax burden. This will limit the room for further tax takes.
The bottom line is that Gigaba is facing a significant revenue shortfall, which will require higher taxes to plug the hole. As such, the burden of higher taxes will continue to weigh down consumers
It was comforting to learn from the finance ministry that long-term retirement savings at the Public Investment Corporation will not be used to fund ailing SOEs. This would have equated to taking the hard-earned, life-long savings of individual South Africans and investing the capital into non-performing assets, which produce a negative return on investment.
According to data from the National Treasury, SOEs produced a return on equity close to 8% in 2012, subsequently deteriorating into negative territory in 2015, and barely positive 2016. Using retirement money to fund value-destroying institutions will further deprive South Africans of financial wellness. There is a clear need to reform SOEs to make these institutions yield better economic outcomes.
The bottom line is that Gigaba is facing a significant revenue shortfall, which will require higher taxes to plug the hole. As such, the burden of higher taxes will continue to weigh down consumers, who will increasingly require a return on their taxes — for example, public services have to be functional. A resolve to reform SOEs needs to be demonstrated.
Ratings agencies will be closely watching the statement and the ANC’s December elective conference before passing judgement on credit quality. A downgrade of the 90% of debt issued in local currency to non-investment grade early next year is likely if the political resolve for change is not forthcoming.
• Mothata is executive chief economist at Alexander Forbes Investments
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