Let us work together to rectify our faults
Finance Minister Pravin Gordhan has come out of a very testing period of the year unscathed and with his head held high as the National Prosecuting Authority of South Africa decided to withdraw the fraud charges that it levelled against the minister in September.
This was largely believed to be the acid test as to whether South Africa would be plunged into junk status with an impending ratings decision looming towards the end of the year. The news that Gordhan won’t have his day in court has prompted many economists to suggest that South Africa will have another stay of execution when it comes to a ratings downgrade; however, don’t place a firm bet on it just yet.
Standing proud
In a nervous and tense Medium Term Budget Policy Statement (MTBPS), Gordhan put on a brave face and gave an honest account of the current state of the country’s finances. He also put his best foot forward when it came to policy measures which look to be laden with a generous measure of discipline.
“Gordhan said all of the right things during the MTBPS, he said that government will adopt a renewed disciplined approach when it comes to how it will spend its money and he made announcements regarding tax which will shift the risk of capitalising the economy from investors to the public. This is a vital move as we cannot afford to scare investors away at this point,” says Stanlib Chief Economist Kevin Lings.
The message from Lings is clear, it is not enough that Gordhan made announcements of a renewed disciplined approach, the country now needs to walk the walk if the ratings agencies fears are to be abated.
Tax buy in
The issue of capitalising the economy through a fresh approach to taxes is a positive move, and probably the right one if South Africa did not face the challenges it does when it comes to taxes.
It is a frightening reality that the top ten percent of South Africa has to bear the burden of 86.9% of the country’s income tax; further, 630 000 people pay 57% of the country’s income tax. What happens to the other 5 246 000 citizens who are eligible to pay tax?
“In order to raise tax, two things need to happen. There needs to be a buy in from civil society and there needs to be a social goal attached to the increase in tax as was the case when it was announced that a tax increase was necessary to fund the National Health Insurance scheme,” says Lings. He added that there could be an argument made that an increase in taxes will be necessary to fund student’s calls for improved access to tertiary education, but not enough will be done by February to validate this.
There is a possibility that an increase in the VAT rate could be on the cards, even if it is only by 1%. However, it is important to note that an increase in the VAT rate will have a pronounced effect on the poorer section of the population, a section that the African National Congress relies heavily on when it comes to votes. Raising VAT may ostracise them.
A changed playground
A ratings downgrade affects us personally and will impact each and every citizen. Because of the personal nature of this threat, we may be tempted to forget to ask if the rest of the world is facing similar problems.
Lings says that the global economic playground has changed and has been influenced by a few factors.
One factor is that there is an increase in global protection. In times of crisis, people tend to put their own interests first. This was evidenced in Brexit where migration worries and the Syrian refugee crisis was a major reason why Britain voted to leave the European Union. We see a similar trend in Donald Trumps rhetoric and his feelings towards immigration. “Global protection has tripled since the Global Financial Crisis and is now bringing up a trend of anti-globalisation. This is bad news for exports,” says Lings.
Another factor is that the world has an ageing population. Research from the US shows that the ratio of children to working adults is decreasing which means that there will eventually be fewer workers to replace retirees. Conversely, the ratio of adults to working adults is increasing. Interestingly, Lings points out that the age group which has shown the highest rise in employment in the US is those aged 70 and older.
South Africa doesn’t have this problem. We have a surplus of youth who desperately seek employment. However, the trend that is affecting South Africa the most is that there is an overall lack of infrastructure spending, from both government and from corporates. “If we look at how infrastructure development benefited China, we can see that massive amounts of jobs can be created through infrastructure spend. Sure, China grew too fast, and they realise that now, but we can benefit from infrastructure development,” says Lings.
Editor’s Thoughts:
All things being equal, Lings says that South Africa has probably done enough to avoid a downgrade, but he cautioned not to bet on it. We need to now implement the programmes that Gordhan spoke about not only in the MTBPS, but in the main Budget announcement earlier in the year. None of Gordhans plans should be news to the public. We are aware of our faults. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
