South Africa’s Department of Social Security raised eyebrows this week by proposing a comprehensive overhaul of the social security system that could significantly increase the tax burden for most taxpayers. This comes at a time when government has broken the social contract through its inability to rein in corruption and deliver efficient, quality social services to the population.
A new green paper outlines ambitions to introduce a northern Europe-style mandatory pension and insurance system that will see employers and employees paying up to 12% of their earnings into a state-run national social security fund. It also details plans to use an income tax increase of up to ten percentage points to raise R200 billion to fund a Basic Income Grant (BIG).
Should these proposals ever pass into law, they could have a severe impact on the economy and especially on industries kept afloat by discretionary spending. Many consumers are already using most of their after-tax income to pay off debts such as mortgages and cars. The question is: will they be able to meet their repayments and other financial commitments if they’re hit with a series of new tax hikes? What’s more, there are valid fears that a BIG could stoke inflation, erasing many of the gains that the initiative is meant to deliver for the poor.
Perhaps the most serious threat lies in further dampening confidence among the middle-class taxpayers who will be asked to foot the bill. The proposals, when added to ideas like National Health Insurance, may accelerate the exodus of the professional and entrepreneurial classes, and trigger tax revolts among those who can’t or don’t want to leave.
As the Financial Mail’s Giulietta Talevi writes: “The Road Accident Fund (RAF) is a disaster, and we all know what a crippling mess the Unemployment Insurance Fund (UIF) has been in paying out Covid relief over the past year. But rather than admit it simply can’t do the job, the government seems to want to double down on its ineptitude.”
While we understand the absolute priority to address poverty, we believe this cannot be done sustainably without proper education, skills development, and strong economic growth. In an environment of endemic corruption at state, provincial and municipal levels, together with an inept and bloated civil service, we cannot find any justification to support additional taxes and a mandatory, state-run security scheme.
Time will tell if the proposals will ever be implemented, given the budgetary constraints and widespread opposition from insurance companies and other sectors. Newly appointed Finance Minister Enoch Godongwana appears not to be a fan of the BIG concept, and National Treasury has been quick to pour cold water on the idea.
“In South Africa, the people have kept their side of the contract and continue to pay taxes, but the government has failed to keep its side of the contract… In fact, the government seems completely unaware that a social contract even exists.”
– Mail & Guardian columnist, Geoff Embling
“If you want to start a middle-class revolution in South Africa, start messing with people’s pensions.”
– Giulietta Talevi, Financial Mail columnist
“The New Social Contract, between governments, people, civil society, business and more, must integrate employment, sustainable development and social protection, based on equal rights and opportunities for all.”
– UN Secretary-General, António Guterres
Global News
- The release of the FOMC minutes on Wednesday sent global markets into a mini panic as the Federal Reserve officials at their July gathering made plans to pull back the pace of their monthly bond purchases, likely before the end of the year. They did, however, indicate that the reduction, or tapering, of assets was not a precursor to an imminent rate hike. Global equity markets sold off on Wednesday and Thursday on the news, before consolidating, but emerging markets and their currencies remain under pressure, which is why the rand has traded significantly weaker, as referenced in our Local News below.
- The UK government is calling on pension funds to participate in an “investment big bang” by allocating more capital to domestic and long-term illiquid investments. This is seen as a proposal that is short on detail and fraught with difficulties, and one that pension fund trustees should treat with caution. British institutional funds have been investing more of their money offshore.
- Despite US President Joe Biden defending his Afghanistan withdrawal, images of Taliban fighters inside the presidential palace in Kabul – after a series of provincial capitals fell in rapid succession and the nation’s president fled – show just how wrong Biden was. Now we have concerned citizens trying to flee the country, while the US president faces difficult questions about his approach to the conflict.
- Gold, traditionally seen as a safe haven, saw prices hold near a one-week high this week as a plunge in US consumer sentiment allayed some concerns of an early tapering by the Federal Reserve. US consumer sentiment dropped sharply in early August to its lowest level in a decade, as rising cases of the coronavirus Delta variant threaten to dent the pace of economic recovery.
- Scotland’s budget deficit has more than doubled in 2020/21, to 22.4% of gross domestic product. This is the highest yearly figure since devolution but is not seen as an obstacle to making the case for independence. The figure could rule out Scotland as an independent EU member because of the rules on fiscal deficits.
- Although UK and US cities show a situation of worsening neglect and urban blight, China sparkles as the government has spent enormous amounts on infrastructure and now enjoys high returns on investment, writes independent analyst Chris Gilmour. The same goes for most Far East Asian economies such as Indonesia, thanks to massive infrastructure spend in recent decades. He says the emerging pattern is that countries with low and/or declining infrastructure spend tend to have high rates of personal consumption spending and vice versa. The US and Britain have high consumption to gross domestic product percentages, but low gross fixed capital formation percentages of GDP.
- In company news, Tencent, in which Naspers owns a significant stake, reported a 29% rise in second-quarter profit, despite Beijing’s expanded scrutiny of the private sector. The Chinese gaming and social media giant said Wednesday that revenue jumped 20% to $21.3 billion for the three months ended June, compared to the same period last year, while profit rose to $6.6 billion. Tencent reported results as the company and other Chinese tech firms are being rattled by Beijing’s historic crackdown on the sector. Tencent alone has lost more than $400 billion in market value after regulators bombarded the sector with penalties, new rules and orders to overhaul parts of its business.
- This week, the Biden administration called for a third Covid-19 shot starting in the American autumn for those who were fully vaccinated with the two-shot regimen, citing the threat from the highly contagious Delta variant and heightened concerns over data showing that initial immunity wanes over time. The booster shot would be administered about eight months after the second dose of the vaccine. The US government said it is preparing to offer booster shots starting in the week of 20 September.
Local News
- In his latest Financial Mail column, Sam Mkokeli believes that what has become clear over the past three years is that President Cyril Ramaphosa’s approach to reform is about plucking the low-hanging fruit rather than implementing deep structural reforms. In his latest piece, Mkokeli asks whether newly appointed Finance Minister Enoch Godongwana can stare down the ANC on a basic income grant. Godongwana, he writes, is on a charm offensive at a time when South Africa desperately needs more investment, and – while he’s a safe pair of hands – he will face many challenges.
- The rand has fallen to its lowest level against the dollar in five months on the back of the Fed’s “taper” announcement, breaching the psychologically important R15 to the US dollar level, and may face months of volatility as investors await a timeline for a reduction of monetary stimulus by the US. The direction of US interest rates is one of the main drivers of our rand/dollar exchange rate. Readers of our opinion pieces will also recall the ongoing findings of our proprietary currency model, which have indicated that year-to-date, the rand has not been pricing in sufficient SA-specific risk, while it continues to trade at a premium to its emerging market peers.
- The recent explosion at a unit of Medupi Power Station is an enormous setback for the country, considering that the explosion cost South Africa 700 megawatts in lost energy generating capacity. Medupi has become the most expensive coal-fired power station in the world to construct, with an estimated capital cost of at least R120 billion (so far).
- State-owned ports owner and operator Transnet is seeking R100 billion in private investment to expand its facilities in Durban and Ngqura (Coega) in the Eastern Cape. This marks ground-breaking reform in the government’s approach to state-owned companies in which private investment has not previously been possible, except for rare examples. The investments are intended to be made over the next ten years and will expand facilities at the ports, which – particularly in the case of Durban – have been hampered by inefficiencies, ageing infrastructure and congestion.
- The start of trading on the JSE was delayed by several hours on Wednesday after the local bourse was unable to process a record number of transactions as investors adjusted their holdings in Naspers. On Tuesday, some R145 billion in shares was traded, causing “significant delays” in processing on some JSE systems. Naspers dominated trade on that day, falling 8.1% on surging volumes as partly owned Chinese online titan Tencent slumped.
- Current data indicates South Africa’s middle class is in trouble, with consumers’ debt situation getting worse with the average debt-to-income ratio at its highest level ever. Second quarter data from debt counsellor DebtBusters shows that debt counselling increased by 18% compared to a year ago. Debt levels have increased substantially, and the number of open accounts has decreased for consumers applying for debt counselling, both of which indicate consumers are seeking help sooner.
- A report by Salmour Research says Woolworths should exit its chronically underperforming businesses in Australia – David Jones and Country Road – and list its extremely profitable South African food business separately. The report states that the beneficiaries of this strategy would be the shareholders who “over the past five years have experienced substantial value destruction”.
- Moneyweb alleges that efforts to rebuild properties, including shopping malls that were looted, damaged and burnt during the recent unrest and looting in KwaZulu-Natal and Gauteng, are being disrupted by the activities of business forums – or the so-called ‘construction mafia’. This prompted the South African Property Owners Association and Black Business Council for the Built Environment to express concern around further harm caused to investor confidence in the South African economy.
Sources: Dynasty, Financial Mail, BusinessLive, Bloomberg, BusinessTech, News24, Reuters, Daily Maverick, Wall Street Journal, The Guardian, Moneyweb, UBS, etc.
