Tax hikes to temper tax-free savings

NERVES at the Treasury will be on edge ahead of the budget speech to be delivered next week. It will be the most difficult of the last decade, at least.

For the first time since 1994 we are facing tax hikes as the government tries to cover its ballooning expenditure in a struggling economy that is not delivering the tax revenue it needs. The spin will be that the hikes are mostly about closing loopholes, and that they will affect the wealthiest most, but they are still going to hurt.

There are sure to be many promises of belt-tightening in the public service and announcements of assets that will be flogged to generate some cash, to suggest that everyone is sharing the burden. But all of that will pall next to the brute fact that we will be handing over more of our cash to the taxman than we have been.

The first tax hikes in 20 years are going to have an interesting economic and political effect. There are far more people who will care about getting less cash out of their pay cheques than there are who care about Nkandla. The fact that we are all to be made to hand over more money may be more politically powerful than the fact that one person doesn’t want to pay any back.

I can’t imagine the Economic Freedom Fighters (EFF) will be as animated about tax hikes, that will affect middle and higher earners mostly, as it has been about paying back the money. But hikes are sure to be leapt on by the Democratic Alliance as it tries to regain some limelight in the opposition benches that the EFF has managed to grab. It is sure to be an issue that captures the attention of its constituency.

The economic effect, though, will be less obvious. The government has said it needs an extra R15bn of revenue, or R278 per South African. That’s about twice the average cellphone user’s monthly spend. While the burden will fall mostly on middle- and higher-income earners, there will be a consumption effect that will affect discretionary income most. Less time will be spent on cellphones and less money spent on fast-food and other nonessentials. That means less profit to be taxed and fewer people to be employed.

It all adds to the rather bleak state of our nation.

The introduction of tax-free savings accounts is only two weeks away, but financial services companies are being remarkably reticent about trying to attract your money. Putting the full R30,000 allowed into an account on March 1, when they are officially launched, means your money will be earning tax-free returns, which can accumulate and compound within the tax-shielded account.

Insurers, asset managers, banks, stock brokers, linked investment providers and the government itself are all able to provide such accounts in terms of the regulations. But not one (I’m aware of) has yet set up its stand ready to take your money come March 1.

There has been some reticence on the part of industry, which has complained that the details of the regulations have not yet been finalised. That is true on the margin. For instance, there still seems to be some thinking happening in Pretoria over how to handle exchange-traded funds that breach the 10% single-equity exposure limit that the draft regulations specify.

But these are issues at the margin, and the government has promised that final regulations will be ready come March 1. We know all unit trusts and fixed deposits will qualify, so what’s stopping asset managers and banks from touting for business?

The lack of readiness takes the shine off what I consider to be the best savings innovation the government has yet come up with.

We are all tired of bemoaning SA’s poor savings rate (though we are among the most insured nations in the world, so we’re not too bad at being prudent).

The lack of savings means consumers are vulnerable to unexpected shocks and less capital is available to invest into growing the economy. We have also become addicted to the fix of unsecured loans as a means of financing the purchase of durable goods (and everything else) rather than the far cheaper practice of saving up to buy that lounge suite or flatscreen. Changing that culture will leave South Africans much better off and the tax-free savings accounts are strong motive to change. But financial service providers need to step up to the plate, and pronto.

Ironically, however, the coming tax increases also mean that less can be put into savings, including the shiny, new, tax-free savings accounts.

In terms of tax hikes, far more people will care about getting less cash out of their pay cheques than about Nkandla