SA SHEDDING SKILLS AND WEALTH
SA’s overall tax base is growing, and fared better during the pandemic than many feared. But the number of high-end taxpayers has stagnated over time, raising questions over SA’s long-run fiscal sustainability
Buoyant tax base estimates for the coming fiscal year made by the National Treasury in the 2022 budget suggest SA’s overall tax base has recovered strongly from the pandemic — though it’s not yet entirely back to 2019 levels.
On the other hand, the number of highincome earners has dropped over the past seven years, bearing out reports of a relentless exodus of skills and talent. This has worrying implications for the robustness of future consumer spending and tax collection, for growth and fiscal sustainability.
Economists are growing concerned, given that the state is veering towards an expansion of basic income support for unemployed adults, something that can only be sustainably financed by raising taxes.
But first, the good news.
In the 2019 budget presented prior to Covid, the Treasury estimated there would be 7.64-million registered taxpayers earning above the tax threshold in that fiscal year. In the 2021 budget, it expected that number to drop to 6.9-million as the pandemic took its toll. But in the 2022 budget tabled last month, the Treasury forecast a recovery to 7.44-million taxpayers — a gain of more than 500,000 individuals year on year.
This suggests SA’s tax base has recovered strongly since the 2020 decline or, alternatively, that it did not shrink as much as feared last year. The fact that personal income tax (PIT) collections came in at
R37bn (almost 14%) above expectations in 2021/2022 would suggest the PIT base held up far better than expected.
At first glance, it appears paradoxical that only 200,000 taxpayers are thought to have been lost in total between 2019 and 2022, despite the economy having shed a net 2.1million jobs during the pandemic.
Economists say this could reflect the fact that most of the jobs shed were among unskilled, low-wage earners who fell below the tax threshold, including many who worked in the informal sector, which was severely affected by SA’s lockdown restrictions.
By contrast, white-collar workers fared relatively well during Covid, with most being able to shift to working from home, thus retaining their jobs, and many achieving wealth gains from rising asset prices.
It is this group that SA relies upon for up to half of all PIT collections and a significant share of consumer spending. It is also the pool of people most likely to emigrate.
While there is no official government data available on emigration rates, UN estimates show that the total stock of SA migrants rose by 70,000 (or 2.3% a year) over the 20152019 period, to total roughly 800,000 people.
Following the opening up of many developed economies post-Covid, anecdotal reports suggest SA is facing a fresh wave of emigration. In fact, Emma Durkin, head of human capital at Altron Karabina, fears the exodus of skilled professionals from SA “could very soon turn into a crisis”.
The IT consulting firm has easily doubled its staff turnover since April/May last year, she says, with emigration having played a key role, especially in the middle-income band (people earning about R50,000 a month).
“The brain drain has always been there in SA, but from May last year, when some borders started reopening, staff turnover spiked dramatically,” Durkin tells the FM.
This was partly because Covid travel restrictions had created an 18-month backlog of people wanting to leave, she says.
“But after the July riots we noticed that people who’d been on the fence suddenly said: ‘We’re out of here.’ They almost saw the unrest as an indication of what the future holds, rightly or wrongly, especially people with young families.”
There is also a “semigration” pattern developing, in which international companies trawl SA’s talent pool of relatively affordable, English-speaking IT professionals, luring them away from SA companies with packages paying euros, dollars or pounds and the prospect of overseas work permits after a year or so.
“There’s only so much we can do as a company to retain these skills,” says Durkin. “It’s very hard to fight when people make up their minds to leave the country. I don’t want to be all doom and gloom but it’s good to face up to reality.”
To find new staff, Durkin says the company is tapping into the domestic pool of unemployed graduates and upskilling them. Only, even these new hires keep on getting poached. It’s also targeting “boomerang rehires” — South Africans who have found the grass isn’t greener overseas, or they can’t stand the weather, and want to return home.
According to a 2019 HSBC Securities report, “The Economic Implications of High-skill Emigration”, by local economists David Faulkner and Thato Mosadi, 55% of SA migrants to Organisation for Economic Cooperation & Development countries in 2015/2016 had university degrees, compared with fewer than 6% of South Africans over the age of 25 living in SA. Among emerging markets, only Indian and Malaysian emigrants had a higher skills profile (see graph).
Better-educated workers tend to find jobs in high-skill occupations and earn higher incomes. In SA, median earnings are three times higher for skilled workers than for semi-skilled workers, and three times higher for tertiary educated workers than those with a high school qualification.
Given that the top 10% of SA households by income account for more than half of all consumption — and just 333,000 taxpayers earning more than R1m a year are responsible for more than 40% of PIT payable — the report warns that a loss of skilled, high-income workers could put pressure on consumer spending, tax revenues and overall economic growth. “The skill makeup of SA’s emigrant population suggests that signs of a renewed rise in emigration is likely to be concentrated among better-educated and higher-skilled workers,” warn the authors.
“This poses several risks for the economic outlook and the country’s growth prospects, since a lack of skills is among SA’s fundamental constraints to long-term growth, undermining the quality of human capital, slowing productivity gains and denting competitiveness.”
But perhaps the biggest risk, they say, is to the fiscal outlook.
With PIT now accounting for almost 40% of gross tax revenues, up by 10 percentage points since the mid-2000s, SA has come to rely heavily on the taxes paid by skilled, highincome individuals. The concentration of spending in SA means these individuals also contribute a large share of VAT receipts — and VAT accounts for at least another quarter of SA’s total tax revenues.
“PIT has become the dominant source of tax revenue for the government,” say the authors. “Accelerated emigration that weakens this tax base could prove a large negative shock for tax revenues and a further impediment to fiscal consolidation prospects.”
Treasury and SA Revenue Service data provide an incomplete picture of the evolution of SA’s tax base. To strip out the effects of shortterm cyclical fluctuations and inflation, Andrew Donaldson, a former deputy director-general of the Treasury, has conducted his own analysis of how the lower-, middle- and top-income bands have performed over the past decade (see table).
It shows SA added almost 1-million taxpayers (above the tax threshold) in the 10 years to 2022, with the total tax base growing from 6.57-million to 7.44-million people. (About 300,000 of the rise is as a result of the threshold falling by about 10% in real terms since 2012.) Most of the growth was driven in absolute numbers by the lower-income segment, which added 572,000 people to the tax net over this period, a growth rate of almost 12%.
Proportionately, the middle-income segment grew faster, by 22%, adding another 291,000 people over the decade.
The smallest growth was in the top-income segment — those earning more than R950,000 a year in 2022 or its equivalent, R600,000, in 2012. This segment has grown by just under 6,000 people or 1.5% over the decade. In other words, it has remained essentially stagnant.
Looked at over the past seven years, the number of top-income earners has declined outright, dropping from 383,100 individuals in 2016/2017 to Donaldson’s estimate of 366,000 individuals in 2022/2023.
Proportionately, the top-income group has dropped from constituting 5.5% of all registered taxpayers to just 4.9% over this period.
In short, the data suggests that the middleincome tax base has continued to grow, while the number of high-end taxpayers has stagnated.
At worst, it suggests SA is haemorrhaging wealth and talent. At best, it suggests SA’s small pool of high-income, high-earning taxpayers is not growing. Both have worrying implications for SA’s fiscal sustainability at a time when the state is actively considering the introduction of a basic income grant financed through higher taxes.
Donaldson is, however, far more concerned about the emigration of middle-income skilled people than he is about the very rich opting to leave. So, he is cheered by the strong growth in the middle-income band.
“On the one hand, this is a welcome trend towards broadening the tax base and lower inequality,” he says. “But on the other hand, if [my estimates] reflect an accelerating loss of wealth and skills, it may be symptomatic of an economy in decline.”
The bottom line is that without sustained, rapid economic growth — something that will be challenging in the wake of the pandemic and recent unrest — the tension between SA’s small, stagnant tax base, and the exploding demand for welfare is likely to become ever more acute.
At worst the tax data suggests SA is haemorrhaging wealth and talent. At best, it suggests SA’s small pool of highincome, high-earning taxpayers is not growing