Post Budget Speech release: Businesses are crucial gateways for creating inclusive prosperity
The 2021 Budget received a generally positive response from many quarters, which was reflected in a rise in markets on the day. Dumo Mbethe, CEO of Momentum Corporate, says the prioritisation of the vaccination campaign as part of the Budget provisions is most welcome. An efficient and accelerated vaccination roll-out is a key dependency for getting South Africa back to normal business activity levels as soon as possible.
The pandemic and related lockdown has left our nation reeling as we face a record-high unemployment rate of 32.5% which increased by 1.7 percentage points at the end of 2020, on the back of rising liquidations, which increased by 14.2% year-on-year at the end of 2020.
“Businesses, small and large, are the primary source of employment and critical in addressing the national priority of job creation. Fortunately tax revenue exceeded the forecast in the 2020 Medium Term Budget Policy Statement and we’ve been able to avoid the R40bn potential increase in corporate and personal tax that was on the horizon in November 2020,” says Mbethe.
Mbethe welcomes the proposal to reduce the corporate tax rate over the medium term. “Our corporate tax rate is high compared to other countries that we compete with for foreign direct investment. Reducing it will increase our competitiveness, make investment more attractive and boost economic growth. The reduction will also offer much-needed tax relief for businesses currently operating in the country and accelerate their recovery as we exit the pandemic and the current downturn,” says Mbethe.
He is also pleased to note the Budget announcement to not increase personal tax and the above-inflation increase in personal tax brackets and rebates. This will provide much-needed tax relief and put money back in the pockets of South Africans, particularly low- and middle-income earners.
According to Mbethe, employment is the door to prosperity for many South African households currently excluded from participating in economic upside. A growing economy and thriving business environment are the foundations for creating more job opportunities. “Expanding employment is not an end in itself but rather a means to give more South African households the opportunity to continuously improve their living standards, achieve a degree of financial freedom and the ability to create a legacy of wealth transfer,” says Mbethe.
Essential role of retirement funds
Momentum and Unisa research highlights the essential role that employment and access to an employer-sponsored retirement fund has in household wealth creation. The South African Household Wealth Index shows that despite the pandemic and severe economic contraction, the real value of South African households’ net wealth increased by the end of the fourth quarter 2020, ending R236.3 billion higher than the previous year.
The research ascribes the huge increase in household net wealth to strong growth in the value of financial assets. “While some South African employees have access to high growth financial instruments through personal investments, access for most is usually provided through their employer-sponsored retirement fund, which is often their largest financial asset. Retirement fund membership is also the gateway that gives most employees access to the group insurance benefits essential for reducing the risk of potential financial catastrophe,” says Mbethe, adding that these benefits have proven particularly critical during the pandemic.
Mbethe was pleased to hear the Finance Minister speak about the introduction of auto-enrollment into retirement funds for all employees. “This thinking aligns solidly with our belief that retirement funds should play an essential role in facilitating prosperity for far more South Africans while reducing the social security burden on the State,” says Mbethe.
The right behaviour matters
Mbethe says the Momentum-Unisa research results also show that wealth creation is not just about having a job and earning an income but also about the right financial behaviour. One of the areas where financial behaviour certainly needs to improve is the preservation of retirement savings.
According to Budget documents, stakeholders continue to engage around the possibility of limited pre‐retirement withdrawals under certain conditions, such as mandatory preservation. “Any early access to retirement savings should be implemented with great care as driving the wrong behaviour will exacerbate already poor retirement outcomes,” says Mbethe, adding that the proposed move does present an opportunity for a future system that allows access but also compels preservation.
How retirement funds can help drive the right behaviour
Retirement fund members have access to various channels to improve their financial outcomes. Key retirement fund players - which include trustees, service providers, financial advisers and benefit counsellors - have a wealth of financial expertise that can be shared with members through appropriate channels. The right information and advice at the right time can make a big difference to members’ financial outcomes.
In closing, Mbethe says, “It is vital that as a nation we break the back of COVID-19 with the effective implementation of the vaccine rollout programme and urgently reopen economic activity levels across all sectors. This will create an environment in which businesses can recover, stimulate job creation and put many more South Africans on the path to prosperity.”