MUST READ: All-inclusive accelerated emigration a serious tax issue – Azar Jammine
BIZNEWS / 13 AUGUST 2019 - 13.11 / STUART LOWMAN
Just as Paul Hoffman has painted Public Protector Busisiwe Mkhwebane into a corner, so it seems President Cyril Ramaphosa and his government find themselves in a similar situation when one assesses the economy.
Tepid growth is forecast, fuelled by an increasing unemployment rate, coupled with a trade war that’s painting a slowdown in global markets. This itself will have a marked impact on collections through the revenue service, which in itself is rebuilding after the Moyane-years. The ANC is putting further pressures on spending with expectations around National Health Insurance, and muddying the investment waters with land expropriation. But as well-known economist Azar Jammine highlights in his piece below, there’s another pin pricking the SARS bubble. It’s an all-inclusive accelerated emigration that’ll put more pressure on an already dwindling tax base. This movement in itself raising concerns among average citizens that the economic choices won’t benefit many. It’s an in-depth analysis looking at who’s going where, and what’s left behind – not a pretty economic picture. – Stuart Lowman
By Azar Jammine*
Studies suggest the rate of emigration is accelerating
One of the most disturbing features of the South African economy in recent times has been the seeming acceleration of emigration of skilled persons. Emigration, especially of Whites, has been a feature of the economy for several decades. However, the trend seems to have accelerated more recently and appears to be embracing more than just Whites. Many people of colour, including educated Black Africans, appear to be joining the fray, having become disillusioned about the direction in which the economy is headed.
Essentially, most of those educated seem to believe that market-oriented processes are the way to go in order to resolve the country’s problems, but this vision clashes with that of the masses of uneducated persons who believe that more government intervention is needed to resolve the problems. The private business sector continues to draw the ire of this section of the population, being perceived as the cause of rising inequality and unemployment through its exploitation of the poor and the working class. There appears to be no understanding of the manner in which it is precisely the wealthier class of society which is generating the tax revenue needed to fund many of the country’s social programs, including the social Accelerated emigration impairing growth prospects, ability to exploit 4IR and the generation of tax revenues needed for development projects such as the NHI, the rollout of social grants and the need for land reform grants which are distributed to those in need. For that matter, income tax statistics show that little more than 2% of the population generates almost 70% of all the personal tax paid in the country.
Examination of the population demographics of the country suggest that this trend is likely to become still more skewed and quite rapidly in years to come.
Three sources of data on emigration
Official figures on emigration are not available in South Africa with one exception. The mid-term population estimates suggest that there is likely to have been a net inflow of 1.07m Black Africans from other countries over the five-year period 2016 to 2021, or roughly 215,000 per annum. Interestingly, this figure is very similar to the level of immigration into Gauteng from other countries but also from within South Africa itself. In contrast, it is estimated that 115,000 Whites will have emigrated over that five-year period, equivalent to around 23,000 per month. The population estimates also show that whilst the Black African population has increased by 12.5m between 2002 and 2019, the White population has barely increased at all over this period. Implied in this is that there has been a significant outflow of Whites from the country. This is the only official government source of information on the subject.
However, there have been two other private studies with conclusions that are not dissimilar in the order of magnitude of emigration which they reflect. The first is the US research company Pew, whose studies of immigration statistics in other countries suggest that there are 900,000 South African nationals living and working abroad. The leading destination countries are the UK and Australia, with around 200,000 each, followed by the US with 100,000, Canada and New Zealand with over 50,000 each. Unfortunately, this does not reflect on the rate of emigration to suggest how rapidly the figure has risen to 900,000.
However, an interesting piece of research was conducted by Thomas Hoppli under the mentorship of Prof David Kaplan at the UCT School of Economics earlier this year. This study likewise concluded that one needed to obtain records from the countries that record the number of residents born in foreign countries in order to track emigration from South Africa. The conclusion was that the number had escalated from 435,000 in the year 2000, to 820,000 in 2017. This represents an increase of 385,000 over a period of 17 years, or almost 23,000 per annum. As with the Pew research, the UCT study concludes that 76% of such emigrants reside in the “big five” destination of South African emigrants, viz. the UK, Australia, the US, Canada and New Zealand. The remaining quarter of South African emigrants go to the Gulf States or to OECD countries other than the “big five”.
There are nonetheless two additional relevant and significant characteristics about these emigrants. Firstly, the level of professional qualifications carried by these emigrants was proportionately much higher than the average level of professional qualifications in the recipient countries. Secondly, it appears as if the pace of emigration has accelerated. Indeed, the UCT study concluded that during the two years 2016 and 2017, the rate of increase had reached over 30,000 per month. Anecdotal evidence suggests even this figure might be an underestimate for the past year.
Shortage of skills being seriously exacerbated
There are a number of reasons why this development should be a cause for alarm. The country is already experiencing a serious skills shortage, especially in relation to the aptitude in science and technology which is reaching chronic proportions. The proportion of students at government schools passing matric mathematics in 2018 was just 22% and those with at least 60% for maths was just 7%. When translated into a proportion of those beginning school 12 years earlier who managed to achieve a 60% pass rate in mathematics, the figure is around 1 in 40. This translates also into heavy underrepresentation in the number of researchers in South Africa compared with peer upper middle-income countries. Typically, there are three times as many researchers in peer countries as there are in South Africa. Furthermore, the proportion of graduates in the fields of science, engineering and technology (SET) in South Africa is far less than in equivalent countries abroad, at around 27% compared with 36% respectively. The combination of all these factors has contributed towards a perennial decline in the proportion of expenditure on research and development in South Africa compared with the rest of the world.
In 2018, this fell to 0.68% of GDP, its lowest level ever, in complete contrast with one of the tenets of the National Development Plan, which is to raise expenditure on research and development to 1.5% of GDP. Other developing countries have been singularly successful in this regard, in contrast with South Africa. The emigration of skills, especially of highly professional persons, is surely exacerbating these trends. However, probably more damaging than anything else is the erosion of the ability to transfer skills as a result of the progressive loss of such skills internally. The proclivity to emigrate has been particularly prominent within the White population where young highly qualified persons of this race group are feeling increasingly that they will not be able to develop a career in the country because of BEE and affirmative action. Failure to develop sufficient skills in SET from school level through to postgraduate level and the associated decline in the country’s proclivity to embark upon research and development, is jeopardising the economy’s ability to sustain a higher growth rate and render the country more self-sufficient and less dependent on imports.
A huge fiscal challenge due to demographic developments
The accelerating rate of emigration is also posing a dramatic fiscal challenge for the country in years to come. As things stand, the White population, which is proportionately much more skilled than the Black African and Coloured populations, is heavily overrepresented amongst the older sections of society. According to the mid-term population estimates released a fortnight ago, the ratio of Whites to Black Africans is 2:3 for those aged above 80, 2:5 for those over the age of 70, 1:4 for those over the age of 60, but between 1:15 and 1:25 in the younger age groups. There are in fact more Black African children under the age of five than there are Whites in the entire country.
As the White population ages further and many die or no longer practise professionally, emigration of their younger folk will simply exacerbate the shortage of skilled persons. The situation is aggravated by the fact that government’s strict visa requirements make it very difficult for professionals from other countries to make up the shortfall both in terms of the skills available and in terms of the people necessary to transfer skills to previously disadvantaged sections of the population. Transformation is likely to be jeopardised severely.
Over and above these constraints is the huge fiscal challenge posed by this development. Given that those with higher skills levels form the kernel of elevated wages and salaries in the country, it follows that a diminution in their proportionate representation within the workforce will result in a decrease in income and at higher levels. This stands to erode the tax base quite severely. As things stand already, no more than 2% of the population accounts for 69% of all personal tax collected.
Furthermore, this ratio is increasing by around 2% each year as the tax base continues being eroded with the passage of time. For any level of economic growth achieved, the amount of tax raised is likely to fall proportionately even faster compared with historical levels. Given enormously financially ambitious developmental programs such as land reform and the National Health Insurance scheme, as well as the huge demands on the fiscus to supply social grants, the government stands to encounter huge problems in achieving its developmental goals under such circumstances. What seems to make this situation that much more serious is that one gets the impression that politicians are blissfully unaware of the imminent shortage of financial resources they might face as a result of the accelerated pace of emigration.
Azar Jammine is the chief economist at Econometrix.
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