The Coffee Table Economics (CTE) with Anchor note by Casey Sprake is distributed intermittently. It is a collection of Casey’s thoughts and perspectives on key economic factors, socio-political events, and the multiple dynamics shaping markets globally and in South Africa (SA).
Executive summary
In this week’s edition, we highlight the following:
- Balancing act: The critical role of tax-to-GDP ratios in shaping the fiscal future of major economies. The tax-to-GDP ratio is a vital indicator of a country’s fiscal health, economic stability, and capacity for public investment. For the world’s major economies, maintaining an appropriate tax-to-GDP ratio is crucial for managing public debt, funding essential services, and supporting long-term economic growth.
- SA’s rising unemployment casts a shadow over the country’s economic recovery. According to the latest Quarterly Labour Force Survey (QLFS) data from Stats SA, released on 13 August, SA’s official unemployment rate increased to 33.9% in 2Q24 from 32.9% in 1Q24. The latest (2Q24) increase is the third consecutive quarter that the official unemployment rate has risen, taking it closer to the record high above 35% reached in 2021 during the height of the COVID-19 pandemic.
- Retail rebound: SA June sales surge amid strategic spending and economic caution. June retail sales offered a positive sign for consumer spending, with YoY growth accelerating to 4.1%. Post-election relief likely contributed to increased spending, reflecting consumer confidence in the peaceful election and the stability of the newly formed multi-coalition government.
Balancing act: The critical role of tax-to-GDP ratios in shaping the fiscal future of major economies
The tax-to-GDP ratio is a crucial (yet often overlooked) economic indicator that measures the proportion of a country’s gross domestic product (GDP) collected as taxes by the government. In simple terms, the tax-to-GDP ratio measures a country’s tax revenue relative to the size of its economy. This ratio is significant as it reflects the government’s ability to generate revenue relative to the size of its economy, which in turn influences public spending, economic stability, and social development. For the world’s major economies, the tax-to-GDP ratio plays a pivotal role in shaping fiscal policy, managing public debt, and ensuring sustainable economic growth. From a fiscal policy and economic standpoint, the tax-to-GDP ratio is a key determinant of a government’s fiscal capacity, i.e., its ability to finance public expenditures, including infrastructure, healthcare, education, and social welfare.
A stable and adequate tax-to-GDP ratio is essential for maintaining economic stability in major economies like the US, the European Union (EU), and Japan. High tax revenues allow these governments to invest in long-term growth drivers, stabilise the economy during downturns through countercyclical fiscal policies and reduce income inequality through social programmes. Conversely, a low tax-to-GDP ratio can limit the government’s ability to provide essential services, leading to underinvestment in public goods and potential social unrest. For example, in countries with lower tax-to-GDP ratios (such as some emerging markets [EMs]), insufficient tax revenues can result in poor infrastructure, inadequate healthcare and education systems, hindering economic growth and development.
Tax-to-GDP ratios also play a critical role in managing public debt. Governments rely on tax revenues to service their debt and avoid excessive borrowing that could lead to fiscal imbalances. In the aftermath of the 2008 global financial crisis (GFC) and the COVID-19 pandemic, many of the world’s major economies (including the US and EU countries) and plenty of EM economies experienced a surge in public debt. Maintaining a healthy tax-to-GDP ratio has been vital for these countries to stabilise their debt levels and prevent financial crises. For instance, countries like Germany have historically maintained relatively high tax-to-GDP ratios, enabling them to keep public debt under control while funding robust social welfare programmes. In contrast, countries with lower tax-to-GDP ratios, such as Japan, have faced challenges in managing their high levels of public debt, leading to prolonged periods of economic stagnation.
High tax-to-GDP ratios enable governments to invest in critical public goods and services essential for long-term economic growth and social well-being. Scandinavian countries, such as Sweden and Denmark, have some of the highest tax-to-GDP ratios in the world, which they use to fund comprehensive welfare systems, high-quality education, and advanced healthcare services. These investments have contributed to high living standards, low levels of poverty, and strong economic performance. Conversely, countries with lower tax-to-GDP ratios may struggle to provide similar levels of public services, leading to lower human capital development and reduced competitiveness in the global economy. For example, with a relatively lower tax-to-GDP ratio than many European countries, the US faces ongoing debates about the adequacy of its public healthcare and education systems.
The largely congruent dynamics of tax-to-GDP ratios are, for the most part, influenced by the structure and level of development of an economy. Advanced economies typically have higher tax-to-GDP ratios due to their more diversified tax bases, including income, corporate, and consumption taxes. These countries have well-developed tax collection systems and a bigger formal sector, making it easier to collect taxes. Emerging economies, on the other hand, often have lower tax-to-GDP ratios due to a combination of factors, including a larger informal sector, weaker tax administration, and lower per capita income. These countries may rely more heavily on indirect taxes, such as value-added tax (VAT), which can be regressive and less efficient in revenue generation. Political ideology and social norms also play a significant role in shaping tax-to-GDP ratios. Countries with a strong tradition of social welfare and public service provision, such as those in Scandinavia, tend to have higher tax-to-GDP ratios. In contrast, countries prioritising lower taxes and a smaller government role in the economy, such as the US, often have lower tax-to-GDP ratios. Additionally, public attitudes toward taxation and government spending can influence the dynamics of tax-to-GDP ratios. Higher tax-to-GDP ratios are more sustainable in countries with broad public support for social welfare programmes and public investment. However, in countries with strong anti-tax sentiments, governments may face pressure to keep taxes low, even if it means reducing public services – again, think the US.
The dynamics of tax-to-GDP ratios are also becoming more and more affected by globalisation and technological change. The increasing mobility of capital and labour and the rise of digital economies have made it more challenging for governments to collect taxes, particularly from multinational corporations. Profit shifting to low-tax jurisdictions, tax avoidance strategies, and the digitalisation of economies have eroded tax bases in many countries, leading to lower tax-to-GDP ratios. In response, there has been a growing push for international tax reforms, such as the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) initiative and the global minimum tax agreement, to address these challenges and stabilise tax-to-GDP ratios across major economies. As mentioned, European countries consistently have some of the highest tax revenues relative to their economies. Among the G20 economies, the top three by tax-to-GDP ratio are all EU members, with the fourth, the UK, only leaving the bloc in 2020. However, these regional trends do not extend beyond Europe. Economic trends, on the other hand, are more evident. For instance, according to World Bank classifications, eight of the top 10 countries by tax-to-GDP ratio are high-income nations. In contrast, the only two lower-middle-income countries in the G20—India and Indonesia—rank among the bottom three. The World Bank emphasises that a 15% tax-to-GDP ratio is crucial for economic growth and poverty reduction. A 10-year study found that countries reaching this threshold could expect their per capita GDP to be 7.5% larger than if they had not. China is a prime example, where rising tax revenues preceded significant per capita GDP growth in the 2000s. However, there are exceptions. Wealthy oil exporters like Saudi Arabia, the UAE, Kuwait, and Brunei have lower tax-to-GDP ratios because they do not rely on taxation to fund government expenditures.
The bottom line
The tax-to-GDP ratio is a vital indicator of a country’s fiscal health, economic stability, and capacity for public investment. For the world’s major economies, maintaining an appropriate tax-to-GDP ratio is crucial for managing public debt, funding essential services, and supporting long-term economic growth. The dynamics of tax-to-GDP ratios vary widely across countries, influenced by factors such as economic structure, political ideology, and global economic trends. As the global economy continues to evolve, with increasing challenges from globalisation and technological change, it is essential for major economies to adapt their tax policies to ensure a sustainable tax-to-GDP ratio. This requires effective domestic tax policies and international cooperation to address issues such as tax avoidance and profit shifting. Ultimately, a balanced and stable tax-to-GDP ratio is critical to achieving economic prosperity and social well-being in the world’s major economies.
SA’s rising unemployment casts a shadow over the country’s economic recovery
Despite SA’s gradual economic recovery, the country is grappling with a relentless rise in unemployment, casting a shadow over the country’s recovery efforts. While key economic indicators show a positive trajectory, this progress has not yet trickled down to many South Africans in the form of job opportunities. Structural challenges, such as a skills gap, labour market rigidities, and the lingering impact of the COVID-19 pandemic, have exacerbated unemployment rates, especially among the youth. As the economy expands, the persistent lack of jobs threatens to widen the inequality gap, undermining social stability and eroding the gains of recent economic advancements. A combination of structural deficiencies, such as a lack of skills, limited access to quality education and training, and inadequate job creation, has resulted in a large portion of the population being unable to find gainful employment. According to the latest Quarterly Labour Force Survey (QLFS) data from Stats SA, released on 13 August, SA’s official unemployment rate increased to 33.9% in 2Q24 from 32.9% in 1Q24.
The latest (2Q24) increase is the third consecutive quarter that the official unemployment rate has risen, taking it closer to the record high above 35% reached in 2021 during the height of the COVID-19 pandemic. On average, joblessness in SA has increased by about 10 ppts in the three decades since the ANC came to power. The unemployment rate, according to the expanded definition (which includes those discouraged from seeking work and thus more reflective of the actual number of unemployed South Africans), rose further to 42.6% – concerningly high. This points to longer-term, structural issues within the local economy as it is difficult to reincorporate and entice discouraged work seekers back into the labour force. Of further concern is the long-term unemployment rate (i.e., those unemployed for a year or longer), which has steadily increased over the past decade – from 65.5% in 1Q13 to 76.2% in 2Q24. Moreover, SA’s unemployment problem remains particularly acute among the youth, where high levels of unemployment hinder their prospects and exacerbate social inequalities. As such, the youth (age 15-24) unemployment rate has risen again (to 60.8%).
On a sectoral basis, employment decreases were seen in the following industries: Trade (-111,000), agriculture (-45,000), private households (-18,000), construction (-11,000) and finance (-9,000). However, increases in employment were mainly recorded in manufacturing (+49,000), Community and social services (+36,000) and utilities (+9,000). Prolonged weak consumer demand, frequent power cuts and logistics constraints at SA’s freight-rail system and ports have unsurprisingly taken a toll on companies’ profits and, thus, their ability to generate further meaningful employment opportunities. On a provincial level, it is interesting to note that while the unemployment rates in the Western Cape (WC) and KwaZulu-Natal (KZN) have consistently been below the official unemployment rate in SA for the past ten years, the unemployment rate in the Eastern Cape (EC) has continuously exceeded it. Employment prospects in SA have traditionally been better in the WC and KZN due to their diverse economies, strong tourism and agriculture sectors, well-developed infrastructure, and strategic governance. These provinces benefit from economic hubs like Cape Town and Durban, which attract investment and create jobs. Additionally, higher education and skill development levels in these regions make them more attractive to employers, contributing to more robust job markets than other parts of the country.
It is worth bearing in mind, however, that employment data from the QLFS survey (a household-based survey of labour market dynamics covering the formal, informal, and agricultural sectors) have diverged sharply in recent months from the Quarterly Employment Statistics (QES) data, which is an enterprise-based labour market survey that only reports on the formal sector. Thus, gaining a more transparent and holistic picture of SA unemployment is becoming increasingly difficult. Regardless of the exact data, we maintain that the official headline unemployment numbers do not fully reflect the true extent of the unemployment crisis in the country. How unemployment is measured tends to overlook specific segments of the population, such as discouraged workers who have given up searching for jobs and are, therefore, not considered part of the active labour force. Additionally, the official statistics do not adequately capture informal and underemployed workers. Furthermore, the official unemployment rate might not fully account for the quality of jobs available or the degree of job security. Many individuals in SA are trapped in low-skilled and precarious employment, leading to underemployment and persistent poverty.
The bottom line
In the domestic economy, material job creation has only occurred when GDP growth approaches 3% p.a. Currently, businesses remain under significant pressure from the ongoing effects of loadshedding, which also weighs on jobs and the unemployment data. Thus, the economy is simply not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans. At the end of the day, SA’s unemployment problem is a complex and multifaceted issue that requires sustained and coordinated efforts from all sectors of society to create inclusive and sustainable employment opportunities for all South Africans.
Retail rebound: SA June sales surge amid strategic spending and economic caution
June retail sales offered a positive sign for consumer spending, with YoY growth accelerating to 4.1%, surpassing May’s upwardly revised 1.1% and exceeding consensus forecasts. MoM sales rebounded sharply with a 1.6% increase, following a revised 0.2% MoM decline in May, leading to a solid 1.5% growth for 2Q24 compared to a 0.2% contraction in 1Q24. Post-election relief likely contributed to increased spending, reflecting consumer confidence in the peaceful election and stability of the newly formed multi-coalition Government of National Unity (GNU). Compared to the previous year, sales at general dealers surged by 7.3% in June, significantly outperforming May’s 1.3% YoY gain. The textile, clothing, footwear, and leather goods sectors also recorded a strong recovery, with 6.1% YoY growth in June, reversing the prior month’s decline. This uptick is likely due to strategic winter discounting, as consumers sought value deals amid concerns over prolonged debt burdens. However, weakness in the food, beverages, tobacco, and home improvement sectors indicates a clear shift towards essential goods. MoM, spending was concentrated on general dealers (+3.1% MoM) and textiles, clothing, footwear, and leather goods (+3.8% MoM), highlighting consumers’ focus on value-oriented purchases and essential items, driven by aggressive discounting and economic pressures.
While the latest retail sales data are encouraging, they should be viewed with caution due to potential revisions. The positive trend is notable, but underlying financial challenges persist, with consumers facing high debt service costs and rising essential expenses (i.e., food and transportation). This economic context reflects cautious spending patterns, with households prioritising necessities and seeking bargains, while discretionary spending remains weak.
The bottom line
Looking ahead, we expect a gradual recovery in retail sales, supported by easing inflation and improving consumer confidence. Anticipated monetary policy easing and the implementation of the two-pot retirement scheme could further boost consumer spending towards the year’s end. Despite near-term challenges, our medium- to long-term outlook for the retail sector remains cautiously optimistic.
