Sizwe Nxedlana: Highlight is consistency, but opportunity lost on fuel levy

FNB’s chief economist Sizwe Nxedlana takes a somewhat different view of Budget 2015 – he believes Finance Minister Nhlanhla Nene could have gotten Government’s finances ahead of the curve by implementing an even bigger increase in the fuel levy (up 80.5c a litre). He applauds Nene’s consistency, though, reasoning that much announced today built on the “interim results” disclosed in the mini-Budget during October. – AH

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Joining us now is Sizwe Nxedlana, the Chief Economist at First National Bank. You’ve been going through the Budget Review Sizwe, as I guess most people in your line of work have been doing. So far, it’s only a couple of hours since the Minister has left his podium. What jumps out at you?

Firstly, it’s always good when what we’re told at the medium term Budget Policy Statement, which for me, is similar to the half-year results of a company, and is aligned with what actually happens in the full-year results, which is what the Budget is all about. We were told ‘this is the Budget that’s going to make a concerted effort to reduce the Budget deficit’, which the government has been missing in terms of its forecast targets over the last three years. Additionally, in trying to reduce the Budget deficits begin to stabilise Government debt, which has increased by R1trn since 2008. We were told that the initial strategy of only focusing on the expenditure lever had proven insufficient and that we would see some tax increases. To that end, I was looking at what taxes increases would be imposed, and we haven’t been disappointed. It’s disappointing that we will be paying more personal income tax, but at least its aligned with what we were told. On that score, personal income tax has been increased by one percent across the board, except for people earning less than R180,000.00. The progressive nature of fiscal policy in South Africa whereby you try to make those who have more, pay more and you try to protect those who have very little. That one percentage point increase in personal income tax is going to yield an additional R9.4bn in tax revenue.

It was interesting on that point because I was talking to the guys at the Treasury in the lockup this morning and they said the adjustment of the rates for fiscal drag means that that’s a rather neutral situation. People who would have paid more because of inflation increases are going to get quite a lot back, in fact. If you’re earning less than R37,500.00 per month (or the number that you gave a moment ago), then you’re actually going to be better off next year, which plays to exactly the point you’re making.

Yes. Anyone earnings less than R180k per annum will be slightly better off since, as you correctly point out, there will be no marginal rate increment for them. There will be an increase in terms of the release that comes through from fiscal drag. The benefit for that is actually good for the macro economy. For example, if we look at consumer confidence and we look at other indicators of household health, what we tend to see is that there are two types of consumers in this economy. (1) A consumer who is relatively well off for example, we asked them about their own finances. Higher income consumers say they hate the economy and they don’t think now is a good time to buy durable goods, but their own finances are quite good. If you look at lower income households though, they’re not doing as well. If you look at bank earnings and the non-performing loans and the fact that that’s been coming off quite nicely over the last two to three years because of non-performing loans and mortgages – that tends to be people of higher income groups.

You’re talking from a unique position, given that you’re in the bank. Sizwe, what about the increase in the transfer duty on property taxes? That comes in quite low now because R2.25m is not a very expensive house, in this day and age.

My understanding was that it’s been scrapped for those that earn less than R750k. It’s been reduced for property worth less than R750k. It’s been reduced for properties between R750k and R2.25m.

No. it goes up significantly and then at R2.25m, it goes from eight percent to 11 percent.

My understanding was that it was scrapped at below R750k but it goes up, above R2.25m.

It does. From R750k upwards, you pay more. You pay nothing up to R750k. In the past, it was R600k. I have the advantage. I’ve been sitting there, going through this stuff for six hours. When you pay R2.25m for a house, you pay 11 percent, rather than eight percent in the past. That’s quite a whack.

Correct me, please. Between R750k and R2.3m, it’s been reduced.

No. It goes up as well.

Okay, so it goes up from R750k. That’s good as well because you’re trying to boost home ownership amongst the lower income households and so I think that is a benefit to the progressive nature of fiscal policy in South Africa.

For you guys (the bank itself), is it enough to put a damper on a market that does seem to be picking its head up?

I think it’s too early to make a conclusive comment on that. What we do know is that higher income households have been doing rather well and we see the evidence on a quarterly basis. The jury will be out in terms of the impact of significant increments, particularly at the very high end – above the R2.3m – on property demand. We should also be cognisant of the fact that interest rates are very low, which is the biggest swing factor, for property buying decisions.

If you’re going to be buying a house for R3.75m tomorrow, you’re going to pay R30k more in transfer duty.

Yes, compared to what you would have paid previously.

That’s quite sore. The big shock was the Road Accident Fund – fifty cents/litre. That’s nearly R11bn, which we’re going to be paying extra, in fuel tax plus another 30 cents/litre on the general fuel levy. When you add it together, you get R17bn. It makes everything else look miniscule by comparison.

It says indirect taxes – an increase in the general fuel levy – at 30 cents/litre generates an additional R6.5bn. Then you have an additional 50 cents/litre, which goes to fund the R98bn fought for in the Road Accident Fund. Previously, our thoughts had been that since the fiscus wants to generate more tax revenue to narrow the Budget deficit, now had an additional lever to pull because of the R4.00 decline in the petrol price. We thought that they’d probably use a bigger increase in the general fuel levy, to gain some of the extra tax that they were looking at, so that they don’t have to do a lot more on other things such as VAT and personal income tax, etcetera. We found it a little bit strange that they chose to do only 30 cents on the general levy and then 50 cents on the RAF. They do indicate that it’s quite a massive, unfunded liability but I do think that it’s somewhat of a missed opportunity to impose a slightly higher, general fuel levy and recoup even more tax. I’m a big fan of sometimes doing more than you have to, particularly if you’ve been missing your deficit target for an extended period. In other words, just trying to get ahead of the curve.

I guess the Road Accident Fund must be in terrible trouble. It was interesting though, that they have almost as much of a surplus on the Unemployment Insurance Fund. You’d think that instead of giving that money back this time around, why not just offset the one against the other.

Exactly. For example, instead of imposing a 50 cent/litre increase in the RAF levy, use some of the UIF surplus to offset (as you say) and then have it slightly higher. Keep the 80 cents overall in fuel levies, but make the amount that goes to the general fiscus and therefore, to get that much more reduction. I think it really is a missed opportunity. If you step back a bit, you consider that we had the election last year. It’s the first Budget of the fifth Parliament. It would have been a good opportunity. People are already upset about other things such as electricity, etcetera. I think it would have been a great opportunity to take the bitter medicine upfront and set yourself up to be in a much stronger position in 2016/2017.

What was the highlight of this Budget, for you?

The highlight is always consistency with guidance that’s been given. You don’t want fiscal policy to shock. On that score at least, Treasury – not only this year, but also over many years – has been very good at telling us what it is that they’re trying to do. They then tend to either achieve their stated aims, or, if they don’t achieve, they’ll at least be able to explain why they didn’t achieve what they’d set out to do and come up with sensible ways to try to rectify the situation. Over the last five or six years, we’ve seen very sensible guidance coming from the National Treasury in terms of how it plans to Budget and how it executes the Budget. To my mind, that is to be commended. If you compare it with other countries (even on the continent), that’s not always the case and it tends to end up generating an increasing amount of uncertainty. Having said that, the problem becomes the fact that it’s one thing for the Chief Financial Officer’s office and pronouncements to be sensible and for them to do things in a world class manner, but once the money leaves the Treasury, there’s still a lot to be done in terms of getting for taxpayer buck.

Sizwe Nxedlana is the Chief Economist at FNB. This podcast was made possible BrightRock, the company that introduced the first ever needs-matched life insurance.