As the government gets set to deliver a revised budget on June 24 to deal with the damage unleashed on the South African economy by Covid-19, some economists and analysts are calling for tax relief and other business-friendly measures. This comes as many companies have collapsed or are in financial difficulty as a result of lockdown measures. Among those urging extensive tax relief and grants even though government debt is rising are Dr Lawrence McCrystal and Advocate Hein van der Walt of the Confederation of Employers of South Africa, who have put forward a detailed argument, below, about why this is the smart thing to do. Others expect the rich to be hit with more tax as Finance Minister Tito Mboweni has warned that we are much poorer. There are signs that Mboweni will take us by surprise, as he told lawmakers on Thursday that the Treasury plans to make very serious and unusual changes to its expenditure plans. Jackie Cameron
Dear President Ramaphosa and Minister Mboweni,
Cc Ministers,Presidential Councillors, Mr Willie van der Schyf, Dr Gerhard Koornhof, Mr Derek Hanekom and valued teams
Cofesa calls for
Wesupport MinisterTito Mbowenisexpected unveiling of a major shake-up in spending and revenue forecasts for the recession-hit economy, your new approach to allow the government to refocus attention on growth-enhancing initiatives and share your view that we can no longer take for granted that the baseline that was there last year will always be the case.
Even before Corona, taxpayers have passed breaking point and a decline of R63,3 bn less in tax income was expected which Finance Minister Tito Mboweni in May estimated to a fall in tax revenue by 32% or more. (Fin24 on 4th May 2020); a terrifying downward spiral.
A study by SEDA, a subsidiary of the DTI, has reported a first year failure rate of 75% for small businesses while Mr Alec Hogg reported in 2011 the average cost of one job created by the IDC amounts to R250 000.
The high costs of and dismal failure of emergent businesses merit substantial government grants to ensure the recovery and sustainability of existing businesses.
A precedent has been set to award R35000 each to small farmers andR200 million relief funding for tourism.
Similarly cash grantsacross the boardshould be paid directly to companies in a bid to rescue those in distress, to stimulate the economy and to avoid further job losses estimated at potentially 2 million.
Minimum of R500 000 grants
Instead of the DTI and IDC investing in emergent enterprises with a 75% failure rate all existing registered businesses should be awarded a basic minimum grant of R500000 plus compensation for their loss in turnover.
Only about R13bn has been paid out so far by the UIF. This is only 10% of the R130bn surplus held in the UIF that is meant for national disasters such as Covid-19. To make an impact, we appeal to you that a large portion of the surplus, supplemented if possible, from other Government sources, be paid out as distress grants to make an impact.
A large number of our Member Companies are struggling to keep their operations from drowning because they have had no cash inflow while cash has been flowing out to pay salaries, rent, etc. So now they have used up their cash reserves and have minimal cash to get their operations going.
Repayable loans will not solve our economic malaise. It is time consuming and costly to administer by an already bloated government bureaucracy. Grants instead, will directly and immediately stimulate spending with a ripple effect, including to generate tax.
It is within the ambit of the UIF Board to pre-empt an estimated further 2 million job losses linked to Covid-19. Employers have contributed substantially to the fund and it is morally and logically correct to use the funds to rescue businesses. While workers contributed 1% of their total earnings, excluding commission, to the UIF, employers contributed a further 1%.
UIF surpluses have also accrued due to many contributors who have emigrated and left their benefits behind, also by contributors such as senior staff and company directors who tend to abandon their benefits, as well as long deceased people. The fund also accrued an estimated R70-bn income on investments over the last 10 years.
Timely distress grants will pro-actively rescue thousands of businesses, including hairdressers and B&Bs, avoiding later reactive costly government enterprise development efforts which, in any event, have a historic failure rate of 75%.
Already in 2019, The World Economic Freedom Index,an index designed by sixty of the worlds top scholars from many disciplines, including three Nobel Laureates, were deeply concerned byour overly large government for a nation at its stage of development.
Nurture businesses, including SMMEs and micro enterprises. Reduced tax will be a direct incentive for growth.
The economists of theWorld Economic Freedom Indexfound that our very high, top marginal tax rate discourages the initiative and dynamism South Africa needs to build prosperity. South Africas top marginal income tax rate at 41 percent is considerably higher than Botswanas (25 percent), the subSahara African average (33.17 percent), and the world average (28.98 percent). This puts South Africa at a considerable disadvantage compared to its competitors.
Even before Covid 19, president Donald Trump and the UK reduced company tax: We must follow Americas example where President Donald Trump reduced company tax from 35% to 21% to turn his economy around, the United Kingdom from 30% to 19%, and in Chinas CIT rate is currently 25%.
From 2015 the number of companies registered at SARS declined from 3,2 million to the present 2 million.The increase in VAT directly affected consumer spending and caused the collapse of large clothing retailers.
A small tax base of 574 000 individuals contributes almost 20% of all tax in SA.A constant spiral of worsening fiscal statistics and higher taxes have been feeding a growing sense of despair about the countrys prospects. The Finance Minister can break that cycle which, hopefully, will boost consumer confidence.
Treasurys scenarios showed that more than7 million jobscould be shed (in addition to the present 10 m unemployed?) as a result of the virus and lockdown that has hugely reduced economic activity. Manufacturing, construction, trade, catering and accommodation, as well as financial and business services will be the worst-affected sectors.
Deregulation of business in general, and specifically small and medium enterprises will broaden the tax base, generate tax income and lighten governments burden to provide welfare grants. Picking the low hanging fruit will be at zero cost to Government and, we calculate, could generate, over time, between 22m and 30m jobs in S.A. plus more than 50m jobs on the African continent, and regain our lost position in relation to comparable economies.
A 121stranking for business regulation disastrous for job creation
The international panel of economists of the World Economic Freedom Index ranks South Africa 121ston business regulation and noted that few challenges are more important for South Africa than job creation and for that it needs to free its business to create employment. Overly stringent regulation can slow business expansion and weaken profits, which are both the means of further investment and the motivation for further investment. 121stranking is a disastrous rank for South Africa and means that red tape is strangling businesss ability to create jobs and prosperity.
Despite the economic boom experienced in the country between 2004 and 2006, the growth of small businesses has stagnated since 2003. Our remaining SMMEs not only need protection, but we need to see them rapidly growing in numbers.
The Index referred to above noted a big concern regarding burdensome regulations.
Registered companies declined from 3,2 million to the present 2 million
From 2015 the number of companies registered at SARS declined from 3,2 million to the present 2 million.Start-ups declined from 250000 (2001) to 58000 (2011)and have been declining ever since.
SMEs have been under particular strain over the last 10 years
Financial and business services sector: 83 000 fewer companies (37% decline). (From 222 532 in 2007 to 139 664 in 2016 )
Start-ups declined from 250000 (2001) to 58000 (2011) and have been declining ever since.
When we had 5, 579,767 small businesses in 2011, they employed an estimated 12 million people countrywide (Source: jtb consulting). This has declined substantially since then, primarily because of the Governments laws and future regulations of Minister Nxesi will make it even worse.
Loss of entrepreneurs Diaspora/brain drain: More than 400 000 high income professionals plus their families have emigrated since 1994 and millions of remaining individuals are utilising the easing of foreign exchange controls to let their money emigrate. (Thank you for calling for their return).About 3 000 super-rich(those with wealth of $1million or R15million or more) migrated from South Africa over the past 10 years, Andrew Amoils, head of research at New World Wealth, told Fin24 inApril 2019.The monthly loss in tax is estimated to be between R10 bn and R20 bn.
Consequently deregulation will make some government directorates and departments redundant, save costs and enable tax reduction
Empirical evidence proves that governments cannot create entrepreneurs. Only businesses, business leaders, enterprises and entrepreneurs can nurture and breed new enterprises.
Failure of government initiatives indicates that it is time to close those directorates, abort those initiatives and save billions. Enter intonew accords with chambers of business, trade, industry and commerce for enterprise development.
Initiatives of government directorates, departments and agencies to create enterprises and entrepreneurs have failed. They should be aborted to save billions of Rands and enable tax reduction.
Our overly large government is a deep concern World Economic Freedom Index
The international team of economists questions as to whether South Africans are getting value for their tax money. Does their money go to providing a sound, well-functioning legal system and security that promotes well-being, and delivers essential services? Or is much of it wasted or stolen? they enquired and noted its concern regarding high taxation and our oversized government. Consequently downsizing government will reduce costs and enable tax reduction.
Austerity calls for urgent action
Overly large government spending and taxation can crowd out other economic activity and limit peoples economic freedom, and their ability to power growth and job creation.Nations that have outsized governments relative to the size of their domestic economy are penalised in economic growth and job creation. South Africas overall rank in Size of Government is 140thand its rating is 6.04.The low rating is a cause for deep concern for a nation at its stage of development.
Measured on a GDP per capita basis, the five nations ranked just above South Africa have an average score of 7.03 in the area Size of Government. Coincidentally, this is the same score of the five nations ranked just below South Africa when measured in GDP per capita terms. However, these nations are a full point ahead of South Africa in their EFWscore which shows just how large the South African government has become in relation to the size of the economy.
After improving somewhat in Size of Government after Apartheid, South Africa regressed significantly in the 2000s.Over the last decade, scores have fallen substantially, indicating government growth and weakening economic freedom in South Africa.
The Index found government interference in the economy through government enterprises and investment is far too great and weakens both economic freedom and the dynamism of the private sector.
Picking low hanging fruit will be at zero cost to Government and, we calculate, could generate, over time, between 22m and 30m jobs in SA plus more than 50m jobs on the African continent, and regain our lost position in relation to these countries: we must deregulate to unleash prosperity.
The 2019 Index scores SAs failure against
We look forward to a game-changer for South Africa.
South Korea and China looked insignificant before embarking on major reforms. The Covid-19 crisis creates an opportunity tofix an economic strategythat has failed to generate the growth necessary to create a better life for more than a minority.
God bless the brave
Dr Lawrence McCrystal and Adv Hein van der Walt
Cofesa Confederation of Employers of SA
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