26 Jun 2020
While the budget speech highlighted vital COVID-19 health and frontline services cash injections, it held no real reprieve for the average income-earning and middle-class consumer – even as he detailed the dramatically worsened economic environment that consumers must face.
While ‘protecting the most vulnerable’ was a driving theme in the budget reallocation, conspicuously absent was any mention of relief for all but the poorest members of society. While no further taxes were imposed, none were softened for the increasingly squeezed consumer either. “People were expecting some kind of tax relief, but there was none,” said Liberty economist Tendani Mantshimuli.
Mboweni’s mention of tax increases in his speech does not mean consumers are safe from further taxing, adds Vimal Chagan, Divisional Executive for Investments at Liberty. “Mboweni said in February that there’s no real room to tax further, so for the mass affluent sector not having a tax increase is good news for them but I’m not that positive that nothing will happen in February next year.”
Further pressure on the man in the street is expected to come from the embattled economy. As we all know, headwinds do not exist in a vacuum – gloomy forecasts have tangible impacts on consumers’ livelihoods and wallets. And unfortunately, there’s seldom been a gloomier outlook than the one Mboweni outlined.
“The South African economy is expected to contract by 7.2% in 2020. This is the largest contraction in nearly 90 years,” said Mboweni in his speech. “We were looking at an unemployment figure of 30.1% before the budget speech and, as the minister stated, there is a contraction in GDP. This means we are going to see unemployment increase. The economy is heading into stormy waters. Your finances are going to be very different going forward,” commented Mantshimuli.
Even without this dire turn, things are not looking good.
“For the mass affluent and retail affluent sector out there, it’s not looking rosy. We are going to have muted returns over the next few years. If we cannot bring debt under control, I think we might slip further into junk status, our cost of borrowing will go up and our exchange rate will have to take a hit. The only way share prices are going to increase in the next few years is if profits increase and the South African economy pivots. If you look at things right now, South Africa is still labour intensive and that will have to change to adapt to the new normal.”
While consumers breathed a sigh of relief in the (temporary) lack of ‘wealth tax’ in the minister’s budget, this temporary measure is a more troubling one – the country will borrow it. Borrowing from outside sources, such as the International Monetary Fund (IMF), will not only not shore up South Africa’s haemorrhaging economy on its own, it will need to be repaid.
“Currently, 21% of all our tax revenue gets eaten by interest costs. That’s now going to increase a lot more in the next few years, all that it means is that it's going to be taken away from other avenues of spending which could further our economy,” said Chagan. This means funds sorely needed for other spending – for example on infrastructure, for all Mboweni’s talk of boosting it – which would help foreign investment trickle back into our already junk status country.
Help yourself, and call your financial adviser
The message for those still employed and all but the most vulnerable South Africans is this: in this difficult time, save yourself – no one else in this climate has the capacity to do so.
“Now is the opportunity to be cutting your expenses, paying off your debt. It’s almost like going into survival mode,” said Chagan. “For people that have money, are sitting with surplus assets and don’t have debt, you need to be looking at your emergency funding. Create an emergency fund of a few months’ salary saved up, because anything can happen – as the COVID-19 pandemic has proved.”
As Chagan notes, the pandemic has changed financial safety nets like insurance from a grudge purchase into a valuable necessity. Questions that precipitate insurance cover like ‘What if I’m retrenched?’ or ‘What if I become critically ill?’ are no longer abstract concepts.
Apart from the need for insurance, Mantshimuli advises getting rid of debt and calling in the professionals. “This is the lowest interest rate cycle we’ve seen in a long time – cut off your debt where you can and do not get into new commitments right now. Apart from that, not all of us are experts when it comes to managing our finances. What happens if I’m retrenched? What happens if my salary is slashed? Follow a strict financial plan, and get an expert to help you weather this very difficult economic environment.”
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