If countries get out of lockdown, government borrowing and incentives will come to an end and the economic toll caused by the pandemic will come home.
Countries around the world must start paying off the massive debts they amassed over the past year – but it could be a long road for South Africa given the financial turmoil before Covid-19.
Local media reports in January said the South African Treasury Department was unsurprisingly considering raising taxes to finance vaccines, including increasing the budget deficit and re-prioritizing government spending.
At the same time, the World Inequality Lab suggested that a “wealth tax” could raise ZAR 160 billion (GBP 7.7 billion, USD 10.9 billion, EUR 9 billion) for the country.
South Africa is by no means the only country considering such a move – for example, Argentina enacted a one-off tax in December – but with such a small percentage of the population paying the majority of taxes, another burden could be a step too far.
International Adviser spoke to several advisors to discuss what the future holds for South Africa and how the coronavirus bill will be paid.
The idea of a wealth tax met with mixed reactions around the world.
Mark McAllister, Senior Partner at Holborn Assets, said: “South Africa has been an economy that has been particularly hard hit by the corruption of Jacob Zuma’s presidency for many years.
“Taxes have to go up to make up the deficit, and that was before a pandemic broke out. With the pandemic, this has simply exacerbated this into an even greater fiscal challenge, and the likelihood of tax hikes and a one-off “wealth tax” seems almost inevitable. “
Rex Cowley, co-founder of Overseas Trust and Pension, said, “Ultimately, taxes will fund the vaccination program. How this will affect the existing tax system and the level of taxes is currently mere speculation, although the cost of the vaccine is real and will be met by rising public debt. “
A spokesman for Sanlam added: “Property taxes create administrative difficulties; They may not make a lot of sales, cause cash flow difficulties, and cause capital flight.
“Nevertheless, a wealth tax can be seen as a means of promoting solidarity in response to the high income inequality in South Africa. Given the myriad of factors to consider when introducing a wealth tax, it is not clear when, if at all, such a tax will be introduced. “
Impact on Customers
The first thought for a financial advisor to hear about potential tax hikes should be clients and how they will be affected.
Anthony Palmer, Group Commercial Director of Carrick Wealth, said, “Taxes are important to South Africans.
“Any increase in taxes will lead more people to seek financial advice to ensure their affairs are streamlined.”
McAllister added, “To say that wealthy South Africans are fed up is an understatement. Increasingly, the rich are leaving the country in droves, exhausted and driven away by first world taxes with third world quality of life.
“Many pay for their own private security, medical care, schooling and long-term investments with expensive government infrastructure subsidized by a tiny fraction of the population.
“Many rightly wonder whether they are getting a fair and equitable value for the rising taxes they experience.
“As a result, many clients are now examining how their wealth is structured and increasingly looking for offshore solutions to overcome the anemic lack of growth on the Johannesburg Stock Exchange over the past few years and the consistent marginal devaluation over the past 10 years. Many customers are simply poorer in dollars each year. “
Long term problems
Taxes are the first initiative when it comes to financing or paying off debts. But sometimes they are not enough to solve the country’s long-term problems.
A spokesman for Sanlam: “We seem to have reached the point where further tax hikes can further weaken economic growth, with a negative feedback loop on the government’s financial position.
“The government is already absorbing much of the available resources and crowding out private sector investment, lowering the potential growth rate and ability of South Africa to cope with the pandemic.”
Cowley of Overseas and Trust Pension added, “It’s less about the amount of taxes than how taxes are used.
“The South African government has identified the cost of corruption and has tried to deal with it. Many of the inefficiencies in government-run businesses are also on the agenda. Such savings are believed to be hundreds of millions and, if satisfactorily addressed over time, could reduce the taxpayer’s burden.
“I think the more important question is how the government will stimulate economic growth by providing tax incentives for companies to employ people and post-employment creation.”
McAllister of Holborn Assets said, “Taxes will inevitably go up to make up for the deficit, but the lack of economic growth is the main concern.
“The biggest missing piece of the puzzle is a coherent, business-centered agenda to get small and medium-sized private enterprises to fill the void created by a bloated state, a failed state-owned enterprise and ongoing corruption problems.”
How can consultants help clients?
When the economic picture clears, what can consultants do to help clients cope with the changes ahead?
Carrick Wealth’s Palmer said, “Make sure their financial plans are up to date, including Wills. Make sure the way they hold their investments is the most efficient structure available and best suits their needs. Also, make sure that their investments are correct for their respective risk profiles and that they are getting value for the fees they have paid. “
Cowley said, “Often the focus is on investing, but these troubled times require a greater focus on liquidity and risk management to ensure sustainable cash flow or access to personal capital and to deal with further economic shocks.
“Using tax-relieved savings opportunities is clearly something that advisors clients should focus on.”
A spokesman for Sanlam added: “More than ever, South Africans need adequate advice, support to keep their long-term financial plans on track, and guidance on how to address the financial challenges they may face.
“During this time, consultants should help customers with empathic, knowledgeable and comprehensive service. While this is our normal ethos, in these unusually challenging times, consultants need to be more empathetic and supportive while delivering excellent service and the best advice possible. “