South Africa has to succeed. There’s just too much to lose – for too many people – if it doesn’t. Some 27 years ago our democracy, much like the writing of our Constitution and political leadership of the time, earned deserved praise for shifting the country forward. It’s time for another such shift – in fact it’s long overdue. Of course, it feels like we set out this narrative before every National Budget Speech lately. And every year we ask for the similar things.
We keep talking about our increasingly problematic levels of sovereign debt, the rising and unsustainable public wage bill and the misappropriation of funds. We keep questioning the rationale for creating more SOEs despite their high rates of failure and predictable drain on the fiscus. Covid-19 has only accelerated a worsening situation for us: we’re shedding more jobs, losing more intellectual capital through emigration, all the while trying to make it through a global health crisis.
Vaccinating all South Africans and economic life support are good reasons to take on more debt, but we must recognise that there’s a point of no return, a point where we’ll simply be too big a credit risk to ask for more funding – much like Zambia, which defaulted on a $42.5-million payment on a Eurobond.
Here are some things we can do to position the country for growth in 2021 and beyond.
- Borrow cautiously and allocate wisely
South Africa’s economy had shrunk by an annualised 51% in the second quarter of 2020. With 1.7 million fewer people contributing to the economy since the pandemic started and an unemployment rate of 30.8%, paying back our R3 trillion sovereign debt has become more challenging, especially as we are borrowing at an average rate of R2.1 billion a day.
While a pandemic is not the time for austerity in health spend, our loans need to be funnelled towards long-term economic development rather than solely the public sector, social security and the servicing of debts. This is especially important since South Africa is likely to only reach its pre-Covid GDP levels by 2024 at the earliest.
The President’s Economic Reconstruction and Recovery Plan aims to focus on aggressive infrastructure investments and all the employment opportunities this will bring. Ramping up local production and exports may increase the country’s annual output by R200 billion while decreasing our reliance on imports by 20% over the next five years according to the State of the Nation address (Sona). Allocating loans to lucrative infrastructure and investment projects will help us pay them off down the line.
- Government expenditure
There is a social contract between a country’s citizens and the government that collects taxes. When this contract is broken through financial misappropriation and corruption, there is a risk that tax collections will dwindle. SARS needs to realign its mandate so that taxes are seen as an economic and moral good that helps progressively realise the rights of all citizens. This can’t be solved with an ad campaign. It needs good policy decisions that translate into real actions, along with heavy consequences for the corrupt.
Contrary to popular belief, South Africa’s biggest tax concern is not necessarily tax collections. It's our Appropriations Bill and what we do with the money once we have it. Our tax money is being siphoned by endless SOE bailouts that continuously fail to produce revenue, an over stretched public wage bill and wasteful expenditure.
While we need more tax revenue to pay off our snowballing sovereign debt and to fund Covid-19 vaccines, Government needs to reign in its expenditure to ensure it doesn’t keep spending unsustainably.
- Widen, rather than deepen, the tax base
Governments across the globe are looking to broaden their tax base – and South Africa is no different. However, we suffer from a demonstratable trust issue, where tax payers fear that increased transparency on their part will result in a higher level of scrutiny from SARS. It’s far more useful for SARS to redirect its attention to individuals and businesses that are NOT tax compliant rather than those who are.
The pandemic has eroded employment figures and potential taxpayers, which calls for the widening, rather than the deepening, of the tax net. We should implement appropriate tax measures for SMMEs and the informal business sector, which constitute around 2.5 million workers and business owners and make up approximately 20% of our GDP.
- Wealth tax
In the annual Budget Speech, we expect to see Finance Minister Tito Mboweni recommend a wealth tax – not on income generated by assets, but on the assets themselves. Many fear that with little time on their hands to make up for the R280 billion tax shortfall of the previous financial year, the government might use over-inflated asset values from outdated pre-pandemic financial data sets.
When Pravin Gordhan increased taxes on income in 2017, as the incumbent finance minister, South Africa experienced a surge in financial emigration. To date, SARS has recorded over R400 billion in financial assets in offshore investments.
Another wealth tax will likely see South Africa’s high-net-worth individuals, the vast majority of who are business owners and job providers, divest from the country in search of more welcoming jurisdictions where they aren’t penalised for contributing to the growth of the economy.
This short- to medium-term tax strategy is very short-sighted as the personal income tax burden already weighs heavily on shoulders of the top 10% of earners.
Should the National Treasury implement a wealth tax, it cannot – should not – be done without the endgame in mind. It desperately needs to make South Africa attractive to large-scale international investors, whilst incentivising citizens to remain and actively invest in the country.
One thing South Africa is getting right is the move away from extreme exchange controls to a capital flow management system. This will position us as a more attractive investment environment that facilitates FDI inflows.
While solutions are always aplenty, civil servants alongside civil society need to be held accountable – by themselves and each other. Rhetoric, tax compliance television adverts and haughty pseudo-policies have only gotten us so far. Now is the time for implementation. SARS needs to take the first step by fostering nation building, a sense of trust and unrelentless reliability. It requires an independent accountability mechanism – along the lines of the National Anti-Corruption Strategy that will report to Parliament like Ramaphosa outlined during Sona. If not, we risk edging ever closer to running out of money and options.