The impact of tax-free investments on savings in South Africa.

Abstract

Since democratic transition in 1994, South Africa has experienced impressive growth in economic and per-capita income. However, the country still remains entrenched in deep-rooted structural problems of unemployment and income polarisation. Macroeconomic policy has attempted to redress these setbacks but outcomes envisaged by policy-makers have not materialised. One of the key lessons learnt from other emerging economies that have achieved elevated degrees of socio-economic growth is that high levels of investment and capital accumulation are pertinent and that these variables are funded from high saving rates. Unfortunately, since financial liberalisation and the relaxation of credit controls over the last four decades, many consumers are burdened by debt and a lack of disposable income leading to low levels of household savings. In an attempt to redress this, National Treasury introduced a new form of tax-incentivised investments in the hope of revitalising savings. Given this backdrop, this study aims to analyse the extent that tax-free investments will rejuvenate household savings. A quantitative method was adopted and a survey conducted amongst financial advisors to ascertain their opinions on the factors that affect savings and whether tax-free investments would have the necessary impetus to entice additional savings. Furthermore, a comprehensive literature review was compiled to record the observations of researchers who conducted similar studies. Measures of success where determined by the extent to which tax-free investments met the criteria of policy-makers. This study concludes that although tax-free investments are cost-effective saving vehicles that are offered by many service providers, tax policy still lacks the ability and appeal to penetrate the masses and to significantly improve the level of savings required for elevated investment and capital accumulation. Tax policy must take more cognisance of socio-economic conditions to allow consumers to generate the cash flow required for saving.