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This will be the 30th National Budget Azar Jammine will be analysing – and not since the early 1990s can he recall one where the constraints were as tight on those compiling it. The chief economist of Econometrix suggests Finance Minister Nhlanhla Nene takes a sharp knife to Government spending and proposes that instead of penalising the 1.2% of South Africans who already contribute 57% of personal income tax, he relies on a hike in the Fuel Levy to balance his Budget. – AH
How many Budgets have you covered Azar?
This will be my 30th Budget that I will have covered, directly, as an economist.
Has there ever been a Budget, before this one, that’s been quite as difficult for the Finance Minister?
That’s a very difficult question to answer and this takes me back many years, especially in the early 90’s, where the situation was not comfortable and ahead of the transformation of our country, one was extremely nervous because there was very little leeway for Government to spend more, without raising taxes sharply. The Government’s debt was rising at that time as well. We knew that there were political imperatives to exceed to, so there was a slightly more positive tone, in terms of how the economy could progress, should the political changes take place successfully, but at the same time, the economic challenges were quite awesome, at the time. They were met, subsequently by a whopping four percent increase in the rate of VAT to plug the gap.
This time round it looks like we have challenges of our own making.
We have got challenges of our own making but I think to be fair, a part of the reason why. It is not entirely of our own making but ever since the global financial crisis, the world economy has been somewhat more subdued and, especially our major trading partners, such as the Eurozone, so our export performance has lagged. As a result, our overall economic growth has not been as strong as it might otherwise have been.
I’ve done an analysis, which shows that more than half of the decline in our long-term growth rate can be attributed to domestic factors, rather than international factors. Included in those are the heightened industrial unrest and the havoc that that has played with some of those sectors in the economy and, more recently, the electricity crisis. Over and above that, of course is the skills shortage, which impair productivity and that is attributable to the very poor educational outcomes that we’ve been deriving in the past decade.
We have got challenges of our own making but I think to be fair, a part of the reason why. It is not entirely of our own making but ever since the global financial crisis, the world economy has been somewhat more subdued and, especially our major trading partners, such as the Eurozone, so our export performance has lagged. As a result, our overall economic growth has not been as strong as it might otherwise have been.
I’ve done an analysis, which shows that more than half of the decline in our long-term growth rate can be attributed to domestic factors, rather than international factors. Included in those are the heightened industrial unrest and the havoc that that has played with some of those sectors in the economy and, more recently, the electricity crisis. Over and above that, of course is the skills shortage, which impair productivity and that is attributable to the very poor educational outcomes that we’ve been deriving in the past decade.
Azar, clearly the Government is not doing everything right, in fact, it is probably doing a lot wrong, yet we are not hearing any messages of change. There are no messages of ‘we’ve got to fix this thing otherwise we’re going to continue along the same path’ or maybe I’m listening to the wrong voices.
No, I think you are correct there Alec, but the answer to why you are not getting the right messages is that the Government is town within its own ranks, in terms of which way to go. On the one hand, you have the factions that are friendly towards market orientation of the economy, and who would dearly love to have less regulation, less interference with the labour market, and more support for business. Then, on the other hand, you’ve got factions that are ideologically motivated for Government to take the lead in controlling the economy. In an environment in which the sense of trust, between Business and Government is weaker than it has ever been before, we are not getting any policies that move the economy forward, as it ought to. In either direction really, and of course, I would think that the one faction would be completely misdirected but the fact is that there is no leadership to go in either direction at the moment. Maybe it’s a good thing that we’re not going leftwards because at least we are able to sustain positive growth and business carries on, just motoring along, unlike the likes of Venezuela. It certainly is not an optimal kind of environment.
No, I think you are correct there Alec, but the answer to why you are not getting the right messages is that the Government is town within its own ranks, in terms of which way to go. On the one hand, you have the factions that are friendly towards market orientation of the economy, and who would dearly love to have less regulation, less interference with the labour market, and more support for business. Then, on the other hand, you’ve got factions that are ideologically motivated for Government to take the lead in controlling the economy. In an environment in which the sense of trust, between Business and Government is weaker than it has ever been before, we are not getting any policies that move the economy forward, as it ought to. In either direction really, and of course, I would think that the one faction would be completely misdirected but the fact is that there is no leadership to go in either direction at the moment. Maybe it’s a good thing that we’re not going leftwards because at least we are able to sustain positive growth and business carries on, just motoring along, unlike the likes of Venezuela. It certainly is not an optimal kind of environment.
What are you looking for, from Nhlanhla Nene tomorrow? What kind of messages might make you more hopeful or perhaps a little more depressed?
From a business point of view, without doubt any message that speaks of support for business, less regulation, greater attempts at trying to deal with labour unrests in a more constructive manner. This would all be extremely welcome. For me, personally, I would love to see more tax breaks for small businesses, to try and ease their pain because they are the ones who are suffering the most from increased regulation and power shortages.
There are political imperatives too, so I don’t know that one will see the kind of response that we would really like to see. The other thing is, of course is the lack of implementation of the policies that are well directed. Here, one is thinking of many of the tenants of the National Development Plan, but we see very little progress, taking place in that regard, in part, because there are a lot of factions, within Government, who are opposed to those ideas.
We’ve got a political impasse in Government, which is sterilising the potential for economic growth.
Yes, absolutely that summarises it.
If you have a look at the financial imperative that the Finance Minister has, we hear of numbers of R12.5bn that he has to raise from additional taxes, to close the gap in his own budgeting. First of all, do you agree with that figure of R12.5bn and, secondly, if you do, where might he start looking for it?
I totally agree with that figure of R12.5bn. It is predicated on the assumption that he’s not going to cut Government expenditure further because the one way of reducing the R12.5bn is to reduce Government spending. You don’t need to plug as big a gap between revenue and expenditure as might otherwise exist. Having said that, I am totally in favour, at the present, of increasing the fuel levy substantially, as a means of financing it. I’ve done a calculation that he can get virtually all the R12.5bn by raising the fuel levy by 56 to 57 cents per litre, which would not be crippling for the economy and would be far more palatable than an increase in, either personal tax rates or the rate of VAT.
There are additional benefits to raising the fuel levy. One thing is that it is a regressive tax, which people do not highlight. You end up with having the wealthy of people, who drive more expensive cars, which consume relatively more fuel per kilometre travelled, paying more of the tax than the poorer sections, who drive the cheaper cars with better fuel consumption. It is also an environmentally friendly levy. To the extent that higher fuel prices might deter people from using their vehicles to the same extent. You would get less pollution, so I am all in favour of that, certainly in the short term now, at a time when we’ve had a flip, from lower oil prices. Obviously, it is not a long-term solution.
How do we compare with fuel levies elsewhere in the world?
Our fuel prices are roughly in line with, I would say the average of the world. In Europe, the fuel prices are a lot higher than they are here. Principally because their fuel levies account for half or even more, of the final fuel price, whereas in South Africa, currently, the fuel levy only accounts for 20 percent of the fuel price. What they’ve done, overseas in Europe, is to raise fuel levies sharply as a quid pro quo for reducing personal tax rates, to levels which are in, many cases, below the ones that we have right now. It seems to work and it is seen as an environmentally sensible way of going about increasing taxes, without having to go the carbon tax route.
Azar, if he decides to increase the fuel levy by 20 or 30 cents, then he will need to look elsewhere, and there are some very politically, palatable options, like raising taxes on the rich.
Yes, he can raise taxes on the rich and I think there probably is scope for him to go one or two percent upwards, on the top marginal tax rate, on individuals. The most obvious thing for me is increasing the rates at which capital gains are taxed but he can’t go overboard in that direction either. If you look at last year’s Budget Review and you relate it to the population distribution of the country, you’ll see that one-point-two percent of South Africa’s population, accounted for 57% of all personal tax collected.
You’re going to chase them away.
Yes, you don’t want to chase them away and that is the biggest risk. The other thing is, ironically is that, of course many of the policy makers themselves; it would be like turkeys voting for Christmas, if they raised personal taxes to sharp end.
Azar Jammine is with Econometrix.
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