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Source: Business Live

SA’s shrinking middle class

New research shows that while the poor have been hardest hit by the pandemic, middle-class and high-earning South Africans —the mainstay of the country’s tax base — are also taking financial strain

 BL PREMIUM12 AUGUST 2021 – 05:00 CLAIRE BISSEKERThe skyline looking over Sandton, Johannesburg. Picture: 123RF/ sunshineseeds

There is worrying evidence that SA’s middle class and tax base may be shrinking while the number of the poor and unemployed continues to grow rapidly. This trend appears to have begun well before the pandemic, but has likely been made worse by the Covid crisis and the latest unrest.

The implications are concerning, as this would suggest that SA is becoming a less sustainable proposition and that the country’s public finances are going to remain under intense pressure over the coming years.

Using data from the National Income Dynamic Study: Coronavirus Rapid Mobile Survey (Nids-Cram), the Liberty Institute of Strategic Marketing (ISM) at the University of Cape Town has just released research showing that while the poor have been hardest hit by the pandemic, middle-class and high-earning South Africans are also under pressure.

It seems that not only are there significantly fewer South Africans earning higher salaries than before the pandemic struck, the average take-home pay for those earning over R40,000 a month has also fallen.

The ISM’s key findings are that:

  • The biggest impact has been felt by those in poorly paid jobs. Between February 2020 and March 2021, roughly 1.15-million people exited jobs paying less than R3,500 a month. (Stats SA’s quarterly labour force surveys have shown that SA shed 1.38-million jobs in the year to the first quarter of 2021, mostly in the informal sector.)
  • There has also been a significant drop in the number of middle-class earners. Besides a 17% drop in the number of individuals who earn between R22,000 and R40,000 a month, there has been a 23% drop in the number of those who earn over R40,000 a month.
  • The average take-home pay from wages among the top million households, those households earning over R40,000 a month, dropped by almost 14% over the same period.

The fact that the poor and the least skilled have been hardest hit by the pandemic has been well documented by the Nids-Cram researchers. But just as alarming, from a fiscal sustainability perspective, is the ISM’s contention that the middle class appears to be shrinking.

While the ISM’s snapshot survey may suffer from data limitations, the question of whether SA’s middle class is withering and its underclass exploding is of fundamental importance to the country’s future.Caption

The size and growth of a country’s middle class is a bellwether of economic performance and a marker of political stability, says Claude Baissac, CEO of risk consultancy Eunomix. Critically, as the middle class is also the mainstay of tax generation, a declining middle class is typically associated with long-term pressure on government revenues.

Eunomix’s analysis of the SA Revenue Service’s (Sars) personal income tax data also paints a serious picture. It finds that since peaking in 2012 at 6.4-million taxpayers, the number had fallen to just 4.3-million people by 2019 — a 32% decline. Over the same period the SA population grew by 11%.

What this means is that the already high dependency ratio of citizens per taxpayer is worsening: in 2012 there were 8.5 citizens for every taxpayer but by 2019 each taxpayer supported 13.5 South Africans, says Eunomix.

According to Sars, the actual number of taxpayers is even lower than these estimates, given that almost 2-million people who are not legally required to submit tax returns continue to file them each year, mainly in the hope of receiving refunds.

Sars’s “Tax Statistics” report for 2020 puts the number of individuals legally required to submit a return at just 2-million for the 2019 tax year — a 14% reduction on the 2.28-million required to do so the previous year. It attributes the decrease to the fact that the taxable income threshold was lifted in the 2019 tax year.

This suggests that in 2019, each taxpayer in fact supported 29 citizens — and this was before the pandemic struck or the latest unrest occurred. Both events have destroyed thousands of jobs and businesses. Unless they can be salvaged, this will lead to an ever greater reduction in the number of taxpayers.

Baissac says it is extremely dangerous when a country’s majority is unemployed and survives just above the poverty line on government unfunded expenditure (debt) and when ever more taxes are squeezed from a shrinking working population with a shrinking tax base.

“This is where SA is. The pandemic has not fundamentally changed that. It has simply accelerated and amplified what has been at work since about 2011.”

But if SA’s middle class is indeed shrinking, this has been well masked by buoyant rates of consumer spending and personal income tax (PIT) collection as the country has rebounded strongly from the pandemic.

Since the low in April 2020, there has been a 94.5% recovery in retail sales as well as meaningful improvement in other forms of consumer spending. In addition, PIT collection has tended to surprise on the upside, while VAT collection has exceeded budget targets.

In real (inflation-adjusted) terms, PIT collection for the second quarter (April, May and June) of 2021 was R106.3bn. Though that’s up a welcome 9% on last year’s figure of R97bn, and in line with the National Treasury’s budget target for 2021, it still represents a drop of about 5% compared with the same period in 2019, before Covid struck.

By comparison, SA’s total tax collection, including corporate income tax receipts, which have been buoyed by the commodity boom, was up 11.2% in the second quarter of this year compared with the second quarter of 2019.

Absa senior economist Peter Worthington says the extent to which PIT has held up is surprising, given the hit to employment from the pandemic and the widespread wage restraint felt across SA’s economy last year.

However, as PIT revenues are strongly concentrated on the upper end of the income spectrum, he feels it may be partly explained by the fact that most of the job losses have been concentrated at the low end, where the PIT obligation is low or zero.

“The good performance in PIT receipts might possibly also reflect better compliance enforcement by Sars,” he says. “Additionally, anecdotal reports of increased emigration of high net worth individuals raise the possibility that some of the good PIT performance may reflect a rush on the part of high net worth individuals to regularise their tax affairs.”

Though economists dispute the extent to which the middle class may have shrunk, the fact that SA has shed a whopping 1.5-million jobs over the past two years has clearly dented economic growth as well as the tax base.

“It is extremely difficult for the government to keep increasing expenditure and to maintain any semblance of fiscal discipline with employment falling [at this rate],” says Stanlib chief economist Kevin Lings.

He finds it worrying that not only is SA’s tax base incredibly small, reflecting SA’s exceedingly high rate of unemployment, but that an increasingly smaller proportion of the population is responsible for generating the country’s taxes.


SA’s middle class and tax base are shrinking. If that’s not reversed, SA’s public finances could become increasingly unsustainable

“These individuals also pay a sizeable proportion of the revenue generated by state-owned enterprises and municipalities,” he points out. “This represents some very significant risks, including taxpayer fatigue and the potential for an increasing lack of tax compliance.

“Fortunately, Sars has been rejuvenated and is making progress in enforcing tax compliance. But the risks remain.”

Baissac warns that, historically, periods when the middle class declined in Europe and North America coincided with deindustrialisation and accelerated globalisation. A shrinking middle class may also portend political fragmentation and the rise of populism and nationalism.

“A country without a resilient fiscal base is at grave risk of failure — one at the mercy of external winds and living under the terms of its creditors,” he says. “If SA is serious about saving the country, it needs to rebuild the taxpaying middle class.”

The problem, according to Baissac, is that most economists still think of SA as an advanced economy with a normal business cycle and, therefore, the expectation is that things will improve next year. So they’re wrongly looking at short-term indicators and SA’s post-lockdown recovery as evidence of green shoots.

“Well, mushrooms grow on dead bodies. Is that a green shoot?” he quips. “Yeah, it is — but there’s a dead body under those mushrooms.”

What’s more important, he believes, are the long-term trends and mutually reinforcing socioeconomic and political factors that explain why Eunomix believes SA is on its way to becoming a failed state.

For a turnaround to happen, says Baissac, SA needs its political leaders to make hard decisions, install world-class competence in the government and adopt an economic strategy that puts the mobilisation of the population front and centre of everything it does.

Nothing President Cyril Ramaphosa has done, including last week’s cabinet reshuffle, gives Baissac any confidence that SA is going to achieve that.