To balance cost and effect: targeted relief for the middle class.

It is a widely accepted theory that the engine of any economy is the middle classes. They are the ones that drive the spending to fuel the internal economic growth of a nation by both spending on consumer goods as well as increased savings. These savings can help fund capital investments. The longterm savings are for their pensions and short- to mediumterm savings for college funds and the likes. Yet the middle classes are the ones often overlooked by the powers that be.

It is understandable to have this blind spot. Considering the more immediate pressing concerns regarding the plight of the genuinely poor the government will always be drawn to have their attention focussed on bringing relief where it is needed most. And on the other hand the government will seek to create the most favorable conditions for the wealthier people to invest in the economy, logic dictates that they are the ones that can actually free up the funds to have a meaningful impact.

And yet this is, in my opinion, not the right track. Why not? I think that the economic power of the masses is underestimated. A large middleclass will have a combined wealth that will be far greater then those at the top end. It just is not a combined wealth that is easily accessible for investments, unless it gets tied up in longterm investment funds.

To remedy this it needs to be guided into longterm wealth and at the same time encourage spending. These two seem to be contradictory, yet I believe it is achievable through a few measures that state and the financial industry can take and all parties concerned would be better off. I know it sounds like magic, but actually it is a simple trick.

First the government needs to establish what income bracket would be considered middle class. The second step will send conservative fiscalists up the curtains I'm sure. I propose that the government will allow the people to deduct the interest paid on their mortgages up to a maximum to be established. For arguments sake the interest on a mortgage up to 1 million Rand. This would be deductible for the period that the mortgage would run with a maximum time of 30 years.

What would the likely effects be? First of all the home ownership is promoted and made more accessible to the people moving from poor to middleclass. Secondly by freeing up more spendable income in this group it is to be expected that their increased spending on consumer goods will stimulate the economy, thus providing a boost to the business world at all levels. Both the cornershop as well as the larger retail outlets would be beneficiaries and could consequently grow. This means hiring more people. The effect will be multiplied as more people are gainfully employed and more will come out of poverty and into the same middleclass.

For the financial services industry this would mean more mortgages and for longer periods of time. People would rather have a mortgage that runs longer to benefit from the tax deduction and increase their savings for their old age. This is not a theory, it is a tried and tested system. Those in the field will know what I am talking about.

Besides the increased savings and spending another bonus is that the building industry will be booming as well. More accessibility to mortgages will increase the demand for houses. Here as well the flywheel effect will help. More building means more labour needed.

So how will the state pay for this reduced income by allowing this taxdeduction? It seems likely that the increased income through VAT from increased spending, as well as the increased income from a growing labourpool will be sufficient to pay for the whole scheme. And more people that are gainfully employed means less money spend on grants to those that are unemployed.

In my opinion this system will benefit the whole nation on both the short as well as the longterm. It is a tried and tested system and although it has its flaws it still seems a pretty easy way to stimulate the economy and the engine of the nation: the middleclass.