As countries start to edge out of lockdown, government borrowing and stimulus are set to end and the economic toll caused by the pandemic will come home to roost.
Countries across the world will have to start paying off the massive debt they have accumulated over the past year – but, with the financial turmoil it experienced prior to covid-19, it could be a long road ahead for South Africa.
Local media reports in January said that the South Africa Treasury is, unsurprisingly, considering tax hikes to fund vaccines, with widening the budget deficit and reprioritising government spending among other options.
At the same time, the World Inequality Lab suggested that a ‘wealth tax’ could raise ZAR160bn (£7.7bn, $10.9bn, €9bn) for the country.
South Africa is by no means the only country to consider such a step – for example, Argentina passed a one-off levy in December – but with such a small proportion of the population paying the majority of taxes – further burdening them could be a step too far.
International Adviser spoke to several advisers to discuss what the future holds for South Africa and how the coronavirus bill will be paid.
Wealth tax?
The idea of a wealth tax has been met with mixed reactions.
Mark McAllister, senior partner at Holborn Assets, said: “South Africa has been limping on as an economy for many years, sadly impacted in particular by the corruption of the Jacob Zuma presidency.
“Taxes need to rise to make up the deficit and that was before a pandemic came along. With the pandemic it has simply compounded into an even bigger fiscal challenge and the likelihood of increased taxes and a one-off ‘wealth tax’ seem almost inevitable.”
Rex Cowley, co-founder of Overseas Trust and Pension, said: “Ultimately taxes will fund the vaccination programme. How will this translate into the existing system for taxation and levels of tax is, at this point, pure speculation albeit the cost of the vaccine is real and being dealt with through increasing government debt.”
A spokesperson for Sanlam added: “Wealth taxes bring administrative difficulties; they may not raise much revenue, could cause cash flow difficulties and may cause capital flight.
“Nonetheless, a wealth tax may be considered as a means to promote solidarity in response to South Africa’s high level of income inequality. Given the wide range of factors to consider in implementing a wealth tax, it is not clear when such a tax will be introduced, if at all.”
Impact on clients
The first thought for financial advisers on hearing potential tax rises should be clients and how they will be affected.
Anthony Palmer, group commercial director of Carrick Wealth, said: “Taxes are a major consideration for South Africans.
“Any increase in taxes will result in more people seeking financial advice to ensure their affairs are optimised.”
McAllister added: “To say that wealthy South Africans are fed up is an understatement, increasingly the wealthy are leaving the country in droves, exhausted and chased away by first world taxes with a third world quality of life.
“Many pay for their own private security, medical care, schooling and long-term investments with expensive state infrastructure subsidised by a tiny fraction of the population.
“Rightly so, many are questioning whether they receive fair and equitable value for the rising taxes they experience.
“As a result, many are now looking at how their wealth is structured and increasingly looking to offshore solutions to outperform the anaemic lack of growth in the Johannesburg Stock Exchange over recent years and consistent rand depreciation over the last 10 years, many clients are simply poorer each year in dollar terms.”
Long-term troubles
Taxes are the go-to initiative when it comes to funding or paying off debt. But sometimes they are not enough to solve the long-term issues of the country.
A spokesperson for Sanlam: “We appear to be at the point where continued tax increases can be expected to weaken economic growth further, with a negative feedback loop to the government’s financial position.
“The government is already absorbing a large share of available resources and crowding out private sector investment, which lowers the potential growth rate and South Africa’s ability to deal with the pandemic.”
Overseas and Trust Pension’s Cowley added: “ Its less about the amount of taxation and more about how taxes are deployed.
“The South African government has identified the cost of corruption and is trying to deal with this and many of the inefficiencies in the government run enterprises are also on the agenda. Such savings are thought to run into the hundreds of millions and if addressed satisfactorily over time could reduce the burden on the tax payer.
“I believe the more important question is how will the Government stimulate economic growth through tax incentives to businesses to employ people and create jobs post-covid.”
Holborn Assets’ McAllister said: “Taxes will inevitable rise to try and pay down the deficit but it’s the lack of economic growth that is the number one concern.
“The biggest missing piece of the puzzle is a coherent business focussed agenda to drive small and medium private enterprise to fill the void caused by a bloated state, failing state owned enterprise and ongoing corruption issues.”
How can advisers help clients?
With the economic picture starting to become clearer, what can advisers do to help clients deal with the upcoming changes?
Carrick Wealth’s Palmer said: “Ensure their financial plans are up to date, including Wills. Ensure the way they hold their investments is the most efficient structure available and best to meet their needs. Also, ensure their investments are correct for their respective risk profiles and they are receiving value for the fees they are paying.”
Cowley said: “Often the focus is on investment, but these difficult times require a greater focus on liquidity and risk management in order to deal with ensuring sustainable cash flow or access to personal capital to deal with economic further shocks.
“The use of tax relieved saving options is also clearly something advisers should be getting clients to focus on.”
A spokesperson for Sanlam added: “Now more than ever, South Africans need appropriate advice, support to remain on track with their long-term financial plans and guidance in terms of navigating the financial challenges they may be faced with.
“During this period, advisers should help clients through empathetic, knowledgeable, and in-depth service. While this is our normal ethos, these unusually challenging times require advisers to be more empathetic and supportive, while providing excellent service and most appropriate advice.”
