Whether you are a passive shareholder in a listed company or actively engaged in running your own business, there is one concept that focuses the mind of any capital provider, that being growth!

Expectations of growth determine which projects or new ventures will be allocated capital and which will be starved of capital. Measured in aggregate, economists and investors get very excited from quarter to quarter about economic growth, or the lack thereof and what adjustments need to be made to a business or economy to keep fuelling growth.

One of the problems facing certain countries at present, and this is effectively a global dilemma, is that to accommodate growing populations and the workforce that accompanies a larger human base, economic growth has to be strong and consistently so, often for unrealistically extended periods of time. What has become quite clear is that rising numbers of people are also more present when economic growth allows for it; this does however carry a deep cost – what I describe as the dark social or environmental cost of economic growth.

Having recently visited China and coincidently having just read the book by well known author and scientist, Jared Diamond called Collapse: How societies choose to fail or survive, I have increasingly been struck by the destructive forces of the human race, most notably towards our host, earth. A deep debate on the social and environmental costs of economic growth transcends typical economic discussions such as global warming and whose to blame, or whether capitalism or democratic socialism allow for better economic management or even whether capitalism in its current form is sustainable. It is instead an intense focus on whether our present day system of individual self interest and survival takes us down a path of self-destruction that is for all intense and purposes irreversible. In my opinion, my January trip to China brought home to me, a very clear perspective of the destructive nature of human population growth and our quest for economic growth at the expense of our environment.

Economic disequilibria as a result of over-population and man’s demand for resources is well documented, an interesting present day example is the Middle East. As we all know, the Middle East has been blessed with the world’s biggest oil reserves, but has some of the world’s poorest natural freshwater resources. For many centuries most of Saudi Arabia’s water came from relatively shallow underground aquifers that could sustain a relatively small subsistence population.

The drilling technology from the 1970’s stemming from the oil industry enabled Saudi Arabia to tap non-renewable ancient fossil aquifers; these are estimated to be 30,000 years old and immense in volume, estimated to be one-sixth as large as the Ogallala aquifer in America’s Midwest. As Steven Solomon puts it in his book, “Water”, with these discoveries the Saudi’s viewing their resource as infinite, used up their water resource as fast as the West was using its oil. (1)

At one point Saudi Arabia became self-sufficient in desert wheat through subsidies of roughly $900 per ton in the 1970’s, and from the 1980’s became one of the leading grain exporters – the production costs, according to Solomon were, however, five times greater than the grain price on international markets.

Today Saudi Arabia still produces roughly enough durum and wheat for domestic consumption, but now that most of their natural water resources are depleted, they have abandoned wheat growing, and will probably be relying solely on wheat imports by 2016. In this example, there is little doubt that the historical abusive usage of water has meant that irreversible damage has been inflicted to the area, and one would think that it represents failed policy and a failed example that modern economies should try to avoid.

Unfortunately, it looks as if the Chinese do not seem too focused at present on long-term environmental impacts of economic growth either. Clearly, their immediate concerns relate more to appeasing the hordes to stave off social and economic unrest which will inevitably flair if the economic juggernaut does not maintain momentum. What follows are my thoughts and observations as I travelled:

The train trip from Beijing to Shanghai covered a distance of 1400km, it was best described as an unpleasant eye opener, we covered large parts of the trip in smog . Maybe the time has come for investors to shift their obsession from commodities to medical companies.

China’s rate of urbanization clearly results in positive and negative consequences – not dissimilar to the experience in many other countries. From a ‘positive’ perspective, BHP Billiton’s half year presentation last week emphasised yet again to what extent resource companies are gearing their capital expenditure towards emerging markets, China, the most prominent. The more daunting aspect to urbanization is of course that it creates expectations, such as earning a better wage, improving living conditions and education needs. In so doing, the virtuous economic, social and environmental pressure cycle unfolds!

Whist China has been adept in managing the pace of urbanization thus far, one senses below the surface brews underlying social and economic pressures. Income inequality has already soared, statistics showing that the top 10% of the population earn at least twenty times more than the bottom 10%. Although the argument can be made that this is no different to countries such as Brazil, we believe that what differentiates China is the population size. Brazil has seven times fewer people than China! The demands and requirements of these new urbanites will have a tangible impact on the prices of many raw materials across the globe and clearly this will imply a serious environmental impact!

As populations become more affluent diets change towards higher protein intake. Per capita consumption of various protein sources like meat and eggs have already quadrupled between 1978 and 2001. These sources of protein are not necessarily efficient as it requires 5 to 10 kilograms of plants to produce half a kilogram of meat.

We have all heard the statistics about China’s water pollution, but a quick revisit would suffice. According to the World Bank, China has only a per-capita share of water of 2700 cubic meters per annum (2005 statistics). This is one quarter of the world’s average, yet they have a fifth of the world’s population. What exacerbates China’s water problem is the uneven distribution of water sources between North and South China. North China has only one fifth the per capita supply of South China.

China is now relying on 10,000 year old aquifers to supply water, with the likely outcome not dissimilar to Saudi Arabia. To address this problem, they are looking to develop a significant dependence on desalination given the current worsening state of their water quality. Desalination thus far has not proven to be an environmentally friendly solution and despite the technology having improved considerably, desalination capacity so far is only 0.3% of total global water usage.

Climate change has led to significant changes in China’s weather patterns. Deforestation and the degradation of grasslands and wetlands especially in Northern China is a key driver behind the frequency of droughts and soil erosion, according to Jared Diamond. The grassland degradation has increased the frequency of dust storms in Eastern China, and has also increased the frequency and severity of floods on the Yellow and Yangtze River. For example, roughly four fifths of the wetlands in the Sanjian Plain in the Northeast China, covering an area of 110,000 square kilometres (bigger than the Republic of Korea) has erroneously been converted to farmland, and although the Asian Development Bank is funding the restoration of this wetland area it will take years if not decades for any positive impact to be seen. As this is an important grain producing area, the question remains where and how the grain production from this area will be replaced.

Although most of us tend to focus on the impact China is having on its own environment, it is worth pointing out that it has gradually externalised its social and environmental pressures to other countries that have thus far been benefitting significantly from supplying products to China. These producer nations, in many instances so obsessed with economic growth, have paid little or no attention to the impact that this has had on their own environments. Ironic is that whilst China exports its environmental impact, in isolated pockets, it has to some extent been able to reverse its own resource depletion! Take for example a reversal in deforestation at home over recent years, with natural forest cover having increased by 12% in total over the last 20 years to 2010 (“old-growth” forest cover is still marginally lower than 1990).

This Angle in no way attempts to blame China, Western economies underwent economic industrialization decades ago and environmental concerns certainly took a back seat then too and not much has actually changed. What is, however, startling this time round is that the numbers are so much larger and thus the consequences too!

Jared Diamond highlights five key factors, environmental damage, climate change, hostile neighbours, loss of trading partners, and the society’s own responses to its environmental problems that has lead to the destruction of earlier societies and civilizations, and cautions that many of these issues are present today on a global scale.

In the words of Aldo Leopold: “One of the oldest tasks in history is to live on a piece of land without destroying it”.

Foot Notes

(1) Water: The epic struggle for wealth, power and civilization – Steven Solomon

(2) Collapse: How societies choose to fail or survive – Jared Diamond

Diamond lists twelve environmental problems facing mankind today. The first eight have historically contributed to the collapse of past societies:

1. Deforestation and habitat destruction

2. Soil problems (erosion, salinization, and soil fertility losses)

3. Water management problems

4. Overhunting

5. Overfishing

6. Effects of introduced species on native species

7. Overpopulation

8. Increased per-capita impact of people

He lists four new factors that may contribute to the weakening and collapse of present and future societies:

1. Anthropogenic climate change

2. Buildup of toxins in the environment

3. Energy shortages

4. Full human utilization of the Earth’s photosynthetic capacity

This is according to Justus van Pletzen, Chief Executive Officer of the Financial Intermediaries Association of Southern Africa (FIA), who says that with the threshold for income tax being increased consumers may be tempted to spend this additional income on short term consumption, such as a new car, or paying for a holiday. “It is vital for consumers to realise the purpose of the tax break is not to spend more money, but to save and ultimately better their financial situation.”

“Consumers should use this extra income towards boosting, or initiating, long term financial investments such as retirement plans and reputable investment opportunities that will benefit them financially in the long run.”

He says another good way to utilise this additional income is to protect their current assets against possible risks by putting it towards vital insurance needs. “For those consumers who may have had to cut back on critical expenses, such as long term or short term insurance cover or medical aid, now is the time to look at either topping up their current cover or taking out cover if they currently do not have any.

“Many South Africans are facing major problems with their level of debt. Therefore, paying off some debts, or making contributions towards paying off these debts, is also a good way to use this additional saving. This will in turn help to better their credit record and enable them to become more financially stable.”

He says for those consumers who want to ensure they make the most of this tax break, employing the services of an experienced financial adviser who can make recommendations based on someone’s personal circumstances and steer them in the right direction in terms of meeting their financial goals is the best solution.

This is according to Robert Gad, tax director at ENS (Edward Nathan Sonnenbergs), who welcomes these proposals by Finance Minister Pravin Gordhan to encourage development, investment and employment in South Africa.

“This is a budget with a mixture of positive and negative features including increases in some key tax rates. In the midst of that, its encouraging that government is proposing to spend some of its tax revenue by creating incentives in these pre-selected business zones in order to advance investment development and employment,” says Gad.

Furthermore, according to the budget speech, tax relief is under consideration for businesses that invest in these zones, including a reduction in the corporate income tax rate and support for employment and training expenses.

“It shows a balanced approach on the part of government – to be introducing and expanding incentives for growth and investment, which represent tax costs to the state, at the same time as tightening up on and raising taxes in other areas, in order to improve tax revenues,” says Gad.

The Minister took an inclusive view for his Budget – we must all work together and we are all accountable – and this is a very noble view that will be fantastic if it is achieved. The overriding theme of the Budget is invest in the future so we can grow and keep South Africa’s fiscal position sound. To realise this future requires some compromise and efficient spending – the Minister mentioned that for their part they would be prepared to spend better and where necessary cut from other areas for the priority areas – having to do more with less – and so the now well-known financial term haircut now found its way into our Budget. Haircuts became famous from Greece where only a portion of the amount owed is paid back. In Greece’s case, as Cannon Asset Managers Adrian Saville points out, there may well be Kojak in place of just a haircut. The Minister looked around the National Assembly when delivering his haircut comment. SA parliamentarians account for a few Kojak styles and there is clearly more scope in some areas than others for cuts. One wonders what kind of a haircut the President will take – perhaps it will be in the air travel department.

My favourite comment in the Budget was the sitting in the corner isiZulu quote: Uzothola kanjani uhleli ekhoneni – meaning how far will you get if you are sitting in your corner.

Sometime it has felt that the massive public sector wage bill was sitting in a corner but this looks set to ‘moderate’

What remains disappointing is growth and unemployment. South Africa is expected to grow a measly 2.7% in 2012 and 3.6% in 2013. This is nowhere near a target that would create jobs. It’s dismal. However for long term growth the investment in people is undoubtedly the way to go. I agree with the Minister that employment is not just the responsibility of one person or department – SA cannot build a great future with our current level of unemployment.

The major issue around the Budget remains not how we collect – it is how we spend. And this is an issue for most. We have excellent collection and this Budget has introduced some increased taxes that will add to the coffers. But what has to be done is how we spend it wisely – get the infrastructure and build the country.

I always enjoy the Minister’s delivery and his at times very dry wit. And while the CGT changes were a bit of a surprise in general the Budget was not overly exciting – which makes it acceptable – new forms of tax but great scope to spend. The reign on irresponsible spending expressed in the Budget can go some way to improving our international standing – deficits that start off small can balloon very quickly.

One of the most interesting changes to taxation legislation to be implemented in the 2012/2013 tax year is the change in treatment of medical scheme contributions. Up to now, taxpayers qualified for a set monthly deduction on their taxable income, based on their family composition. It was contended that these monthly deductions were more rewarding to wealthier taxpayers. As an example, if you pay tax at a rate of 40%, your medical tax benefit is 40% of the set deduction (R720 x 40% = R288), whereas a taxpayer with a tax rate of 18%, only receives (R720 x 18%= R129).

The new system ensures the same monetary benefit to everyone in the form of tax credits. This will operate in a similar fashion as the tax rebates afforded to individuals in that it reduces the tax payable by an individual (and not the taxable income). The tax credit amounts have been set to closely replicate the level of benefit a taxpayer in the 30% tax bracket was receiving within the 2011/2012 tax deduction system. Therefore individuals in lower tax brackets will receive slightly more than before and individuals in higher tax brackets slightly less in monetary terms.

The bottom line for consumers

The 2012 Budget again asks us to tighten our belts, focus on savings and to contribute a little more to the state coffers. Consumer Price Inflation, which on the back of rising food and petrol prices, is expected to increase to 6.2% this year, before tapering off to 5.1% in 2014.

Increases in sin taxes will be between five and eight percent this year and is always seen as a positive re-enforcement of moderation, however in context this is one example of how consumers will have less income available for all household expenditure, which also includes medical cover.

Medical cover can easily be up to 10-15% of the average family’s monthly household expenses, so consumers are encouraged to plan for this, as if you would your normal budget.

Having extra cover in the event of hospitalisation or chronic illness is important for the long-term health of your family and your pocket.

When looking for the right healthcare cover, most consumers want solutions that suit their unique needs, not products designed for the general population.

We have seen this trend increase dramatically over the last few years with more and more consumers buying different types of options that suit their individual needs better.

Many medical schemes now offer a range of affordable products with individual tailoring to maximise cost savings.

Members are encouraged to participate in their medical scheme’s wellness programmes and savings options. These not only help make being active more rewarding through added benefits such as gym memberships, but also help members to minimise any out-of-pocket health expenses.

Flexible complementary products, such as Momentum’s HealthSaver, have a prominent role to play in supplementing access to private healthcare cover, as it assists members with a dedicated savings account to allow them to tailor their day-to-day cover to their unique needs. This can also assist members with the funding of medical expenses that is typically not covered by their medical aid, such as cosmetic surgery.

Medical schemes have also negotiated with designated healthcare service providers to keep costs low for members, so it is important to tap into these. Members choosing to belong to options using these network providers typically benefit from a lower monthly contribution. Using a healthcare professional [hospitals, GP’s and pharmacists] outside of your medical scheme’s specified partner network could unfortunately mean that health claims are only partly reimbursed, resulting in a costly co-payment.

In addition, consult your pharmacist about generic medicines and how these can work for you. Generic medicines are just as effective as brand names and typically cost much less.

According to Jan Howell, Consulting Actuary from OMAC Actuaries & Consultants, this announcement confirms the move from a system of tax deduction for contributions to medical schemes to a tax credit system. “Before, an individual could deduct a portion of their contribution to a medical scheme from their taxable income. This system clearly favours the wealthy as the higher the marginal tax rate and the medical scheme contribution, the higher the deduction. The new system introduced by Government has been done to create a more equitable system, which provides the same relief to everyone – hence the tax credit. Under the new system, individuals will be taxed on their full income, but will then receive a tax credit.”

Howell says the 2012 Budget Speech also changes the tax deduction allowed for out of pocket medical costs. “Out of pocket medical costs is still treated as a tax deduction until 2014, when this will also be converted to a tax credit. The amount of the deduction allowed equals the amount by which medical scheme contributions exceeds 4x the tax credit plus any out of pocket medical expenses, limited to the amount which exceeds 7.5% of taxable income.”

On the increase in the dividends tax rate

“This has come as quite a shock given that all previous announcements and the law as it stands at present indicate a 10% rate. The proposed 50% increase in the dividends tax rate to 15% so late in the day will no doubt cause considerable administration burdens on those companies and regulated intermediaries that have to account for the tax.

“More importantly, the rate of tax is part of the law that can only be changed by an Act of Parliament. One hopes that this too will be possible before the implementation date. In essence, given that domestic companies are exempt from the withholding tax on dividends, it is only individuals and non-residents who will be affected by the increased rate. Then again, given that most double taxation agreements (DTA) entered into between SA and foreign jurisdictions reduce the rate, usually to 5%, non-residents too should not be unduly affected by the proposed increase.”

Increase in inclusion capital gains tax (CGT) rates

“This announcement was an obvious means of generating additional revenue, notwithstanding the stated reason being to reduce tax arbitrage and broaden the tax base. While a few foreign countries tax capital gains on the same basis as ordinary income, most either provide for inflation indexation or reduced inclusion rates (like SA).

“In effect, the effective tax rate payable by an individual (at top marginal rates) will increase from 10% to 13.32% (an increase of 33.2%), while the effective CGT rate for companies and trusts will increase from 14% to 18.65% (a 33% increase).

“Foreigners owning property in SA will be adversely affected by the increase because non-residents are required to pay CGT on the disposal of any immovable property owned by them in SA.

“The rate increase is due to come in on 1 March 2012 – so there are at least a few days left to benefit from the old rate.”

Interest incurred on share purchases

“The proposal to allow a deduction for interest incurred on the acquisition of shares to be deductible in certain circumstance is VERY welcome.”

It is enough of a struggle to have a handicapped child, particularly where that child requires significant medical support, well in excess of any normal level of expenditure. In the past, these costs have been fully tax deductible, which has made caring for the child more affordable. From 1 March 2014, expenses relating to a handicapped will no longer be deductible but to the extent that expenses exceed three times the total allowable tax credits will be converted to a tax credit of 33,3%. For a higher rate payer with medical costs of R100,000 per annum, the credit will be R16 740 as opposed to the tax value of the deduction of R40,000. This will come as a severe blow to those providing medical care to their handicapped loved ones and unfortunately may affect the quality of the care that can be afforded.

These include the 15% dividend tax, an unexpected 50% increase from the expected rate, capital gains made will be subject to an increased inclusion rate resulting in the increase of the effective tax rate from 10% to 13.3%, and the proposed taxation on luxury goods.

Furthermore, the annual interest exemption will be phased out to make space for tax preferred savings- and investment accounts.

For those working and seeking to accumulate pensions for their retirement, the introduction of pension capping will come as a serious blow. Although the tax deductible limit has increased to 22,5%, the annual tax deductible retirement contribution will be limited to R250,000 per annum for individuals under the age of 45 and R300,000 per annum for individuals over the age of 45. For those who left retirement funding until their later years of employment (as prior to this they could not afford significant contributions), the effect of taxation of the contributions to the pension fund, will leave those short of their intended capital or income requirements on retirement.

The budget review indicates that there is room for improvement on the compliance of high net-worth individuals and this will be a focus area for the South African Revenue Service (SARS) in the coming year.

Clearly, high-net worth individuals will make a greater contribution to the fiscus, and can expect greater scrutiny and audits of their personal tax affairs.

Nola Brown, Associate Director, Tax at Webber Wentzel says:

“Considerable progress has been made with regard to the stated intention to make South Africa an attractive spring board into, mostly, Africa with the introduction of the ‘headquarter company’ regime. In essence, both SA and foreign investors can use this new structure to ensure a less burdensome tax regime in relation to cross-border activities.

“However, in order to enhance South Africa’s attractiveness as a holding company jurisdiction, we also need to see improvements in respect of South African capital gains tax on the sale of foreign subsidiaries by such headquarter companies. It would also be very useful if SARS could release the details regarding the form and manner in which the international headquarter company income tax election must be made.

“In addition, some clarity regarding the proposed introduction of a withholding tax on interest is necessary. Will it in fact be introduced on 1 January 2013? Specifically in light of the fact that it was previously mentioned that the tax authorities would be renegotiating certain double taxation agreements which allowed for a 0% withholding tax on interest, and it is not clear whether this process will be completed by the beginning of next year, when the tax is due to be implemented.”

What should the Minister be doing to address the expected shortfall in revenue?

Des Kruger, Director, Tax at Webber Wentzel says:

“While South Africa was perhaps somewhat protected from the negative effects of the world financial meltdown, it is clear that the SA economy has not been progressing as expected. As a result, there is an anticipated shortfall in revenue. The issue is how is this going to be addressed?

“Nothing needs to be done in regard to raising income tax on individuals as ‘fiscal drag’ operates to increase the tax take even if rates remain the same. Fiscal drag is the term given to the effect of the progressive individual tax rates on increases in remuneration. In essence, an additional R1 of income may push a taxpayer into a higher tax bracket, resulting in that R1 being taxed at a higher marginal tax rate.

“Given that the worldwide trend is to reduce corporate tax in an effort to kick-start the economy, it is highly unlikely that any changes will be made to the rate of corporate tax.

“A number of European countries have increased their VAT rates to try and balance their budgets. While the SA VAT rate is relatively low in comparison to many other jurisdictions, because VAT is perceived to disproportionately impact the poor, it would be political suicide to increase the rate without at least introducing further relief in respect of so-called basic goods. This in a sense then requires a higher general rate to derive the requisite revenue. SA, in line, with international trends, provides relief for a few basic foodstuffs, such as milk, brown bread, maize meal and vegetables, but there would no doubt be pressure to provide extended relief.

“An obvious source of revenue is through capital gains tax. At present SARS does not apply tax to the full amount of the capital gain. It only applies tax to 25% in the case of individuals and to 50% in the case of corporates and trusts. Increasing these so-called inclusion rates would provide significant additional income and would, in my opinion, be the most politically palatable approach to increasing revenue and overcoming the shortfall.”