It is
almost unnecessary to point out that South Africa is a country in which
internal savings at least don’t exist or, more likely, are being unwound in
favour of consumption expenditure.
Savings form the backbone of economic growth. Without savings, there is no capital to
provide for growth in the future, and to replace what is wearing out now, or
has already worn out.
Savings
come from several sources.
The
individual is the traditional source of savings and investment. The old bank savings account that the ‘old
folks’ talk about hardly exists today.
Children are not taught, as they used to be, that saving is a
virtue. For the modern child, a saving
is a means to afford that new cellphone or iPod. Consumption is the new standard, and the more
conspicuous that consumption is the better.
The new middle class of Blacks that has come into being should also be a
source of savings. Unfortunately, it has
become necessary for those people to display their success in expensive ways,
to display their sophistication.
Remember: one definition of ‘sophistication’ is ‘conspicuous waste’! In addition to these inclinations, the high
real rate of inflation is a positive disincentive to meaningful postponement of
savings accumulation. As an example, a
colleague purchased the most expensive production car in South Africa in
1974 for R10 300. The most
expensive car today, apart from the exotics, runs at over
R1 300 000. How much of his
income would he have had to save to accumulate enough to realise his dream car
if he had postponed expenditure from then to now?
A way that
individuals used to save, and still do in certain parts of the world, is by
investment in shares in companies. The
notion of a Stock Exchange is based on this.
Unfortunately, the Stock Exchange in South Africa has become a casino,
with traders dominating the market, moving the prices on a minute-by-minute
basis in response to rumours and technical trading systems, both of which are
not available to the small investor. A significant
part of the savings of the individual has fallen into the hands of these
traders, in the form of retirement funds.
A brief chat with anyone who is approaching retirement will inform you
of how exploitative these traders and investment managers are. A couple of years ago, a newsletter from the
Old Mutual announced that the company’s investment portfolios had performed
well, generating a ‘good income’ on such investments, but, unfortunately, the
fees charged by the investment managers and by Old Mutual had eaten up this
‘good income’, leaving the investor with a meagre growth in the value of his or
her life savings of around 1%, significantly lower than the rate of
inflation. Is it any wonder that the
individual despairs of saving, that he would rather spend his money on current
enjoyment rather than putting it aside for the future? The fact that tax takes a big bite of the
result of this risky process, if it is at all successful discourages the
individual investor still further.
Another
form of saving is by the investment in assets by companies. In this case, the funds, derived ultimately
from investing individuals, are used to generate income. Unfortunately, the ever-increasing taxes
applied to companies and their shareholders is driving the companies to
generate large profits in the short term in order to provide an adequate
after-tax income to the investors. The
two factors of the tax bite out of distributable (or saveable) profits and the
need to generate profits to or above market expectations in order to maintain a
share price are exacerbated by the high real rate of inflation (taking into
account increasing capital cost of assets, exchange rate disadvantages and high
interest rates compared with the rest of the world) to create a situation where
long-term investments are generally not as large as they should be. The rate of savings of companies is therefore
lower than it should be.
One of the
functions of Government is to save, by investing a part of the taxes it draws
from people in infrastructure and income-generating assets. The more the Government spends on income
distribution, the less it has available to invest in savings. The abjectly poor performance of virtually
every Government-managed public entity, like Eskom, Telkom, schools, Spoornet,
Portnet, Sanral and all the others will tell you how ineffective Government has
been in fulfilling that investment role.
And, contrary to the beliefs of Joe Modise, Thabo Mbeki, Alec Irwin and
the other ANC advisers, a purchase of R54 billion worth of useless munitions
does not constitute an investment, except that part that flowed from the
munitions suppliers to the recipients’ Swiss bank accounts!
The final
source of savings is money that flows from the frugal citizens of other
countries to South Africa
in the form of loans. Unfortunately, South Africa is
a country that uses huge quantities of those loans. In South African hands, only the part of
those loans that have been repaid are really savings. The loans are essentially a receipt in advance
of future savings, at a rate discounted by the total cost of repaying those
loans, including both interest and exchange rate losses. A loan of this form is essentially a
mortgaging of the savings of our children and grandchildren.
If South Africa desires
to beat its competitors around the world in generating jobs and a better
quality of life for its citizens, it is an absolute essential that the rate of
savings is increased dramatically. There
are other changes that need to be made, but without savings and investment,
those other changes will have little effect.
In an
effort to accommodate the leaders of the Government, who complain that too many
people criticise, but do not make alternative suggestions, here are a few
thoughts.
First, take
the South African Revenue Services out of the pockets of the people and the
companies. Allow the people who earn the
money to invest at least some of it.
Tax, in the form it is managed in South Africa , is essentially
destructive of economic activity. Rather
than jubilation at the fact that the Budget now exceeds a trillion Rand, the
Minister of Finance should set out a plan to reduce the total amount expended
by the Government by at least ten per cent per year for at least the next five
years. This would, perhaps, give the
Government a reason to cut the rampant corruption which, in many of the cases
of which we are aware, exceeds ten per cent of the expenditure by a comfortable
margin. As long as the source of funding
to Government remains open-ended, there is no incentive to cut its waste!
Second, the
individual must be encouraged to save.
Do this by abolishing any form of tax on money invested in long-term
investment instruments, say for at least five years if invested in savings
accounts, shares or similar, and do not tax the income, whether from interest
or dividends, during the term of such investment. If the savings instrument is disinvested
within that five year period, tax can be applied retrospectively, and, if it is
held for the five years, the tax exemption can vest. This simple method will effectively bring
back individual saving as a viable part of the individual’s monthly budget.
Third,
allow the companies that invest in plant and equipment a tax credit equal to
the write-off life of that asset, but allow it in advance. That will provide a meaningful incentive to
long-term capital investment, and that investment will convert into a higher
rate of taxable earnings by the company.
One of the secrets of success of German industry is that the companies
invest continuously in the newest and most efficient plant and equipment. In that way, even though the country ranks
among the highest labour-cost countries in the world, it is able to produce
products that continue to outsell competitors, even the low-cost
competitors. Again, there are other
factors present, but efficiency in the plant is surely an important one.
Fourth,
allow the employers a tax credit for any subsidy it makes to assist its
employees to invest. The credit could be
higher if the investment is made in the shares of the employer, in order to
assist the employees to identify more closely with the business objectives of
the employer, a sure way to reduce the incidence of labour disputes and the
sabotage of the employer by employees, which appears to be on the rise as a
result of the increasing distance between the employees and the employer as a
result of the political posturing of the ANC and its associates in Government.
Finally,
introduce a system of minimisation of tax on those bodies that manage the funds
of investors, such as insurance companies and banks, rewarding them for
achievement of net benefits to investors above a set return on investment,
which must be above a realistic estimate of inflation, and penalising them if
the return is lower. That will go a long
way to ensuring that these funds managers are focused on return to investors,
not only to themselves.
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