SA Economy on the Brink

South Africa’s outlook has been dealt several heavy blows this week following Eskom’s financial results, and the latest unemployment data, which has raised the question: where to from here?

South Africa’s unemployment rate climbed substantially in Q2 2019, StatsSA said on Tuesday (30 July).

The Quarterly Labour Force Survey for Q2 2019 showed that the unemployment rate increased by 1.4 percentage points from 27.6% in the first quarter of 2019 to 29% in the second quarter of 2019.

Eskom, meanwhile, reported a record loss for the year ended March 2019, of R20.7 billion, following years of corruption that has seen the power utility’s debt spiral out of control, fuelling rumours that international ratings agency Moody’s could downgrade South Africa’s sovereign debt to junk status.

Analysts had hoped for a turnaround in fortunes following the election of president Cyril Ramaphosa, and post the general elections in May. However, the country has been dealt one body blow after another, raising serious questions about its turnaround prospects and timeframe, which seems to get further away as both global and local financial institutions narrow economic growth.

The reason why the state’s finances finds itself in such a death-defying spiral, according to chief economist at Efficient Group, Dawie Roodt, is because, especially since 2009, state spending has increased relentlessly at a time when tax collections collapsed – mostly because of a faltering economy.

“At this rate of debt increase, it is very clear things will turn out very unhappy, very soon,” he said.

Roodt said an investment note that to fix the problem of collapsing fiscal accounts, a combination of three things needs to happen to stabilise the debt to GDP ratio.

“The first thing is that the economy should preferably start growing at a rate of 6%, at which rate the debt to GDP ratio will stabilise.”

“Unfortunately, the ruling elite seems to be hell-bent on doing even more damage to the economy with all sorts of silly socialist ideas, like the suggested creation of yet another state bank, a new mandate for the SARB and the unaffordable NHI. Because of this, economic growth, believe me, will not save us from this fiscal cliff,” he said.

A second option is to increase taxes by the equivalent of 5% of GDP (current market price), which is approximately R250 billion. For example, VAT needs to increase by more than 11 percentage points to get this kind of money, or personal income taxes need to increase on average by nearly 10 percentage points.

This option, Roodt stressed, is irrelevant as a tax increase of this magnitude would have a huge adverse effect on growth, while overburdened taxpayers would likely revolt.

“Preferably, and the only realistic option left, is to cut state spending with a similar amount: R250 billion,” Roodt said.

“Percentage wise that is a real reduction in state spending of approximately 15%, or 20% in nominal terms. Now, show me the politician with the clackers to go and give COSATU the good news. But even if we could implement such austerity measures, the initial impact on the economy will be hugely negative – damned if you do, damned if you don’t,” the economist said.

Roodt also delivered a scathing assessment of president Ramaphosa.

“Judging from president Ramaphosa’s actions so far, he must either be weak, doesn’t appreciate the danger in which the South African economy is, or he simply doesn’t care,” Roodt said.

“I think we have a weak president that simply doesn’t have the political capital to implement unpopular structural changes. All that is left for him to do is to use (gutted) institutions, like the NPA, to do the heavy lifting for him. He is playing the “long-game”, but this economy doesn’t have a long time.

“Even if we can somehow wave a magic wand and get rid of all the corruption and incompetence in the state and SOEs overnight, the perilous condition of the state’s finances will need an extraordinary attempt to save us from further economic collapse,” Roodt said.

Roodt said that none of his three scenarios will likely prevent the inevitable:

“Debt will continue to balloon, the economy will falter, poverty and unemployment will keep going up and those that are responsible for all the troubles will keep on blaming “the others” for their absurdities”.

“By then the only remaining alternative will be to inflate your debt away. But for that to happen you need to control the SARB – and with Lesetja Kganyago at the helm, that is not going to be easy. But be assured, as we sink further into this debt chaos the pressure on the SARB will become relentless and eventually also the SARB will buckle under the pressure. And then, inflation.”

“What we must understand,” Roodt said, “is that no structural adjustment, no new dawn, no fresh start can be taken seriously unless it includes an admittance that there are just too many trying to live off too few. Many tens of thousands of civil ‘servants’, including those at SOEs, are simply not needed. They must go.”

Top ten SARS trends

Article published on news 24 at https://www.fin24.com/Money/Tax/10-tax-trends-sars-is-clamping-down-on-20190701

Tax season 2019 officially opened on Monday July 1 for taxpayers who use the updated digital channels, namely eFiling and the SA Revenue Service MobiApp. This year, SARS is clamping down on non-compliant taxpayers – with the following 10 trends in the spotlight.

Outstanding or late returns

Outstanding returns and late returns remain a concern and SARS says it will step up its enforcement of penalties in this regard.

Rental and Capital Gains Tax

“Many taxpayers still do not declare rental income from properties and we will improve our data matching in this regard by collaborating with the Deeds Office.

“This matching will also allow us to better enforce non-compliance in the declaration of Capital Gains Tax,” says SARS.

Commission

SARS will renew its focus on monitoring income and expenses from commission earners.

Trusts

SARS is concerned about the accuracy of declarations of distributions to and from trusts to the beneficial recipients.

Refunds

“We have also noticed tax preparers unethically promising taxpayers that they will secure a refund. They then look for opportunities to understate income or overstate expenses,” says SARS.

“This is a serious offence and could result in criminal charges as well as financial consequences for the taxpayer who remains accountable to SARS for their submissions.”

Fabricated expenses, IRP5s

SARS has noticed a trend of fictitious refunds being claimed for fabricated expenses and losses, as well as fictitious employers generating IRP5s for the sole purpose of claiming refunds.

Multiple returns

Fraudsters file multiple returns to create refund opportunities and syndicates re-use IRP5s across multiple individuals.

Risk modelling

SARS is working hard to improve the integrity of its profiling capability by using sophisticated risk modelling and expanding our data set.

Last year SARS prevented over R8.2bn fraudulent returns from being paid.

Prosecutions

SARS is currently working with both the SA Police Service (SAPS) as well as the National Prosecuting Authority (NPA) to criminally prosecute fraudsters.

SARS has already successfully convicted a number of taxpayers for non-compliance. It has even successfully convicted some of its own staff for colluding with taxpayers.

The super-rich

“We are instituting a renewed focus on high net worth (HNW) Individuals who often arrange their affairs in complex ways, often presenting higher compliance risks to SARS,” the revenue agency said.