Nazmeera Moola: Budgeting 7.7% more for public sector wage bill “sends wrong message”

Nazmeera Moola, chief economist at Investec Asset Management, is sanguine about most aspects of Budget 2015 – including the opportunistic timing of the R17bn extra fuel tax and a continually rising Government debt-to-GDP ratio. But she lost her composure when talking to the Budgeted increase in public sector employee compensation – saying the near double inflation rate increase is “sending entirely the wrong message.” – AH

This podcast was made possible by BrightRock, the company that introduced the first ever needs matched, life insurance. Nazmeera Moola, Chief Economist at Investec Asset Management joins us from Cape Town. Well, the Budget is something of the past now, but wow, how do you like that 50 cents a litre for the Road Accident Fund. That came out of left field.

Well, I think that they were always going to have to do something a little bit dramatic on tax increases. For me the question was always do they use the drop in the oil price to hike the fuel levy or do they increase that? They opted for the safer option, which was the Fuel Levy.

That’s big, R10bn on the Road Accident Fund, another R6.5bn on the 30 cents/litre, what they call the General Fuel Levy increase, 80 cents a litre. That takes a bit of opportunism. If the oil price hadn’t fallen, who knows?

Exactly, I think it was very much opportunism and I don’t think they would have opted to do it, without the fall in the oil price. Given what happened last year I think that you should see the inflationary impact of this increase, should be quite limited.

All right, so let’s talk about the debt to GDP ratio. I know this is something that most economists are fretting about, in 2008, we were at 21.8 percent, and we are now heading for 44 percent. Is this it? Do you think it will level out at that level?

Well it is suggested to level out at that level. The only way it does, is if they actually control expenditure, in line with what they’ve projected. I think they’ve been reasonably conservative on their revenue assumptions, so I wouldn’t expect massive disappointments on that side. It is all about controlling expenditure.

I guess, relative to other countries, it doesn’t look too bad yet.

It doesn’t look too bad but once you start consolidating all the State owned entities, it’s certainly not comfortable.

What was the highlight out of all the hour and a bit that our Finance Minister, Nene, presented to us today?

For me, the highlight was the move they’re trying to make to include more private sector participation in the electricity generation. We’re trying to look for something to be optimistic about, from the Budget. They’ve significantly increased the tax incentives for co-generation, from 45 percent per kilowatts out, to 95 cents per kilowatts out and there were a couple of other moves that were made along the way. I think the only way we solve our electricity crisis in South Africa is more private sector involvement and the Finance Department is certainly trying to do its part to help that.

There was also some good information in the State of the Nation Address about that as well. I’m sure you picked up the various initiatives that had been coming in from the private sector as well, so it seems to be a new direction.

It seems to be that there is finally some willingness to go in this direction because a lot of these proposals were put on the table in 2008, when the grid first came under pressure. Then there was very little appetite from the Government or Eskom to really, take it seriously and they seemed to have floundered. Whereas now, there does seem to be an increased momentum. I suppose two hours a day, without electricity will do that for you.

When you have a look at overall, on the tax side, one percent increase in the overall tax rates. The people earning more than R37K/month are going to pay more. People who earn less than that will actually get a slight cut in their taxes. Is there anything to read into it?

I think that the Treasury itself needed to do something on personal income taxes, they needed to start to make a move in that direction. There was a lot of speculation that it would be a far bigger move, perhaps the introduction of a super-tax bracket for income above R1m or R1.5m, so we didn’t see any of that happening. Rather the net expects of the tax changes, is actually quite neutered. I personally think it was quite clever. The Minister ended up providing relief for lower income earners and putting a bit of an increased tax on the higher income earners, but nothing that was particularly large.

So the golden goose is not quite being throttled to death yet, and I say that because two-point-eight percent of the total taxpayer, which is 188.000 people, are contributing one-third of the personal income tax.  

I take the point. I understand the point. I have a lot of sympathy for the point but I also think we need to understand that that’s a reflection of the income inequality in South Africa.

Well, eight-and-a-half million people, who are registered as taxpayers, by contrast, don’t pay any tax at all and 17 million people get welfare grants, so I guess we’ve got a long way to go to get more equality in this country. What about the change in the property levies or the transfer duties, they’re starting to kick in a big number, 11 percent from R2.25m.

That was a big increase. There’s been speculation ahead of this Budget that there would be some measure introduced on either the rich or some sort of wealth tax. There was a lot of concern that there may be some increase in the dividend withholding tax, which did not materialise. Instead, what we saw was this property tax. Property tax and transfer duties are always a little bit contentious. Are you taxing inflation? I think that you have seen the biggest growth and wealth in South Africa, in the property market, so it is not entirely unfair to levy the transfer duty as much as I may, personally not like it.

Is it going to affect property prices?

I think it will slow the improvement that we’ve seen of late. It’s certainly not going to help turnover, so if someone is buying a house for the first time, would have to take into account an extra three percent charge, for any house prices above R2.25m. I think the way Treasury would have looked at is that they’ve abolished transfer duties on properties below R750k, so they are trying to promote middle-income homeownership by doing that and, to some extent they’re funding it out of more expensive homes.

A similar trend with the microenterprises, big tax breaks being announced there.

Again, I think that there’s a huge commitment by the Finance Minister, over the years, to try and be more business friendly to smaller businesses. You’ve seen it in the fact that they’ve tried to simplify tax filing for them. I’m not sure if SARS has completely climbed on the bandwagon of what the Treasury has tried to accomplish, so the move we saw today should also help with the margins. I think the single biggest thing, the combination of the Finance Department and SARS can do, is just make it a whole lot easier for small businesses to file taxes.

Taking the State of the Nation Addressed, together with this one, are we doing what is right to lift the economic growth out of its morass that it seems to be stuck in?

The single most worrying thing I saw in this Budget was the compensation line items. There you saw compensation growth expected to grow by seven-point-seven percent this year, which is, as I say, a bit higher than we saw it in October and that’s entirely the wrong message. We’ve seen a huge amount of pressure across the labour market, over the last five or six years, and a lot of it followed from the very generous wage hikes that were provided in 2009, by the public sector. I have no problem with wage increases. I certainly would like households to see their real wages rise, provided that it is accompanied by productivity increases. When it is not accompanied by productivity increases, the net effect is that companies respond by cutting jobs, so the problem here and I’m sorry to rant about this, it’s a personal passion of mine Alec, is that Government providing overly generous wage increases. Seven-point-seven percent, at a point when inflation is going to average four-point-two or four-point-four percent this year – three percent real -, which makes it very difficult for other employers out there to say they can only afford inflation or inflation plus one.

Yes, and the investment markets, generally, how do you think they’ll interpret this Budget?

The market seems to think that it is kind of okay. Bond markets, I think, is digesting the fact that it means a shallower dip in the inflation profile this year. That’s what the Fuel Levy does, but overall, you’re not going to see a massive increase in issuance. You’re seeing some. I don’t think it’s particularly negative for the equity market either, so I think it is okay for markets.

Nazmeera Moola, is the Chief Economist at Investec Asset Management, and this podcast was made possible by BrightRock, the company that introduced the first ever needs matched life insurance.

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