Sunday, 2 September 2012

Investment and Saving


 
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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