Between corporate South Africa and the government there is about R700-billion of cash sitting in the bank.
Corporate South Africa has steadily increased its cash holding from about 12% of GDP in 1994 to a massive 38% of GDP in 2006. This equates to more than R600-billion.
Government meanwhile has R99-billion in cash. Efficient Group economist Dawie Roodt said that government’s cash pile increase is a direct result of an increase in the country’s tax burden.
Roodt said that while Finance Minister Trevor Manuel talks of putting money back into the pockets of consumers through tax cuts, the reality is that the tax burden has increased from 22% of GDP in 1994 to 27% now.
Last year, earners in the upper income brackets actually experienced a net increase in tax because of the changes to medical aid tax deductions.
Roodt said the government should utilise its cash by lowering the tax burden or increasing capital expenditure.
While the cash sloshes around corporations and government, household savings are at all-time lows.
Roodt said that secondary tax on companies (STC) is partly responsible for this cash build-up by corporations as it requires companies to pay tax on dividends distributed. As a result companies are loath to pay the money back to shareholders and have been building their cash positions.
The figures show that while their cash piles have been growing, corporates have been significant investors, accounting for 14% of GDP or R175-billion of direct investment compared to government’s R64-billion.
Scrapping STC would reduce their cash pile by returning cash to shareholders who now at least bene- fit from the fact that the cash holding is usually reflected in the share price. But a point will come where corporates will have to maximise the returns from this cash or face the wrath of shareholders.
Roodt said the government is taking money away from households and not utilising it effectively. “It is immoral to use taxpayers’ money to fund an airline to compete with Kulula.”
Peter Brooke of Old Mutual Investment Group says there are three ways in which corporate South Africa can utilise its cash. Companies can pay back to shareholders in higher dividends or they can undertake share buy-backs where they believe their shares offer value.
They could also make acquisitions and buy out competitors. All of this is positive for the equity market and investors whose savings will increase in value.
Roodt said that the huge cash build-up by corporates does not result from the strong positions of market dominance some South African companies enjoy.
He said that although there are sectors that are benefiting from a lack of competition, they contribute a relatively small amount to the total cash pool, the larger global companies in the resources and construction sectors being the major contributors.
He also argues that just because a company like Telkom is charging high prices doesn’t always mean that it is efficiently run when it comes to cash flow. Despite protectionism, they don’t have a lot of cash due to inefficiency, says Roodt.
He highlights South African Airways (SAA) as a good example of a protected company’s ability to destroy capital. This week it was announced that SAA has again gone cap-in-hand to government to bail it out at a cost of between R1-billion and R4-billion.
Old Mutual economist Rian le Roux said the government lacks the capacity to spend on capital expenditure.
He also argues that some of the cash build-up is due to obligations government has over the next three months in meeting government bond redemptions. The national treasury confirms this, stating that of the total, R58-billion is for operational cash to meet redemptions and interest payments on bonds. R42-billion is in a sterilisation fund held on behalf of the Reserve Bank. Once payments have been met, there will only be R3-billion available although this does not take into account any revenue inflows from corporates and value added tax.
Roodt argues that the national treasury continuously underestimates this revenue and therefore is always running an unnecessary surplus. He also argues that treasury bills should be issued to meet debt obligations rather than increasing the burden on taxpayers.
Le Roux says that whatever surplus government has, it should sit on it rather than cutting personal tax or spending it on increased wages or social grants all of which will stimulate consumption expenditure.
More stimulus by consumption expenditure is not a good idea, says Le Roux who argues that the reason the tax burden has increased is simply because more people are paying tax due to improved tax collection.
If government does decide to provide tax relief by lowering STC, it could be quite an ingenious way of shifting cash savings towards households. A lower rate of STC would encourage corporates to pay out higher dividends which would feed back into the household savings pool considering that 80% of employed people participate in the equity market through their pension funds.
But don’t hold your breath as Le Roux says that unless the marginal tax rate on individuals is lowered, a lower corporate tax would create an arbitrage opportunity for tax avoidance, where individuals would set up companies just to benefit from the lower tax rate, something Manuel would want to avoid.
The top marginal rate of tax on individuals is 40%. The effective tax rate for companies is 37,5%, including 12,5% STC.