Wednesday, 10 March 2010

The collapse of South Africa’s middle class?

Was anyone else worried when they read the lead story in last weekend’s Sunday Times? And did anyone else think, ‘Well, at least it’s not only me’?

Headlined ‘The Crunch’, the article made it very clear that South Africa’s middle classes – the backbone of our tax systems – aren’t coping with their expenses. Economist David Roodt pointed out that people earning between R100 000 and R500 000 a year (that’s between about R8 000 and R40 000 a month) are ‘most definitely taking huge stress’: ‘They are the taxpayers in the economy,’ he said, ‘but they are not at the receiving end of the (money raised in) taxes.’

As a freelancer, I’m way nearer the R8000-a-month mark than the R40 000 one, and every month I slide a little deeper into debt. Once I’ve paid my bond and the single insurance policy (on my car) I have left, my rates and taxes, my electricity and communications bill, and buy petrol and groceries, there’s less than nothing over. For over a year now, I’ve been living off what used to be quite a big surplus in my housing bond account: I now have about another two months’ worth of money in that, then there’s genuinely absolutely nothing left.

The Sunday Times article accused the middle classes of irresponsible spending during the ‘fat’ times – taking advantage of easy credit, the article says, they ‘splurged on homes and cars’ and ‘did not save’.

In my experience, this isn’t entirely true. Ten years ago, I owned two properties and had a reasonably small bond. I had a modest money-market savings account that I fed each month. I had an up-to-date retirement annuity. I had some disposable income each month, which I used for some capital projects (home improvements, buying a new stove, that kind of thing) and a bit for fun (travel, dining out).

Ten years on, my bills have risen astronomically – but my earnings haven’t; in fact, I’m still earning the same today as I was ten years ago! As time went by and I became aware that my earnings weren’t keeping up with my expenses, I cut back: I paid off my car (a 2004 Toyota Corolla), I cancelled a life-insurance policy, I stopped going out for dinner, I switched to cheaper ‘no-name’-brand groceries, I froze payments to my retirement annuity (and would have cashed it in if the law had allowed), I began shopping for clothes at secondhand stores.

Time passed and things didn’t improve. Electricity prices rose, petrol prices went through the roof, food became significantly more expensive. I rebonded my properties and, of necessity, began drawing a little money out of the surplus each month to pay my bills.

Last year, much against my will, I put one of my properties on the market. It’s still there: I’ve had three offers, all three for hundreds of thousands of rands less than I bought it for. I refused all three, and now, with no end in sight to my own personal financial crunch, I’m wondering if I did the right thing: perhaps I should have just cut my losses?

And I’m not alone. Many of my friends are, like me, freelancers; most of them have, like me, over the course of their careers been responsible about saving, mainly in the form of shares or property. And most of them have recently been forced, like me, to try to cash these in.

The problem, of course, is that we are South Africa's middle class, and the properties we’re trying to sell are middle-class properties – in other words, we’re trying to sell our assets to people who’re in the very same boat as we are. We’d dearly love to sell our properties and alleviate our debt loads, but we can’t: the people we’re trying to sell them to don’t have the money to buy them! The South African middle class is fast running out of ready cash.

Almost two years ago, in July 2008, a hearing held by the US’s congressional Joint Economic Committee warned of exactly this situation in America: what was happening financially in that country, they said, wasn’t just a middle-class ‘squeeze’ but the beginnings of an actual collapse.

At the hearing, Harvard law professor Elizabeth Warren pointed out that while inflation-adjusted average household income in America had declined by $1 175 since 2000, basic expenses for an average household had increased by more than $4 600. She said, ‘Seven years of flat or declining wages, seven years of increasing costs, and seven years of mounting debts have placed unprecedented stress on ordinary families. By every critical financial measure, these families are losing ground … the strong middle class that has been the backbone of the American economy … is in jeopardy.’

What happens when the middle class collapses? When most of us have lost our jobs and/or our houses, and can’t support ourselves, never mind pay the taxes that keep the country running?

My dilemma, in the meantime, is on a micro scale: I’ve lost a tooth and need to see my dentist; my car desperately needs a service; one of my cats requires veterinary attention for a skin disorder; and there are two large holes in my roof that I should get fixed before winter. I was lying in bed last night, going through this list and trying to decide which one was most critical.

Then I realised that it was a pointless exercise: I don’t have enough money to attend to any of them.

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tonypark said...

OMG - first the back, now the teeth.

Sorry for the lack of commenting, but I'm not waving, drowning in work.

I just had two fillings done in Hoedspruit. Expensive, but cheap by aussie standards, so be grateful you're not an australian freelancer.

Muriel said...

Hello Tony and how marvellous to have you back in contact!

ali g said...

With your dilemma suggest first priority is take the cat to the vet asap but leave your car at home...that's about all I can suggest at the moment due to my current self induced alcoholic fog.

Muriel said...

For those puzzling about ali g's comment, he was spurred by my comment about my cat's skin condition to take his own cat to the vet. On the way back, there was a nasty car accident. The car was totalled but, by some miraculous turn of fate, ali, his wife and his cat are fine. Sadly, as a result of its apparently conscience-pricking qualities, ali says he's decided to stop reading salmagundi. (But you're joking, hey, ali?)