Johan Els, Senior Group Economist at Old Mutual Investment Group joined Alec Hogg to discuss where Finance Minister, Nhlanhla Nene can be expected to find the extra loot needed to balance the books ahead of the upcoming Budget Speech to be held on the 25th of February 2015.
How much additional money does the South African Government need in the 2015 Budget to meet its requirements?
Well, as we heard in October when the new Minister of Finance had his first Mini Budget, he’s going to target an additional R12bn in revenue for this coming fiscal year. That doesn’t sound like a lot. We’re hoping that he goes for more. What has been positive about his announcement in October is that he’s not only targeting extra revenue, but he’s willing to cut expenditure to the same extent, too.
So R12bn this year, R44bn over three years. Where is the most obvious place to find it?
The easiest for him, politically speaking, would be to look at the top end – maybe increasing the top marginal tax rate. That’s one option. Others at the top would be to tinker with capital gains tax or the dividends tax, so he has a number of options in terms of getting the money. I suspect though, that he’s going to spread it fairly widely. Maybe the bulk’s still at the top end in terms of the rich having to pay more, but maybe on the indirect tax side as well. The fuel levy comes to mind, since the fuel price has dropped so much. That’s an easy one now. Fifty cents/litre extra on the fuel levy will give him R10bn extra, so that alone is quite a tempting option. It’s probably going to be a mix.
For each one percent increase in the marginal income tax rate, how much would come into Government?
Let’s say he lifts the top margin from 40 to 41 for everybody earning above R1m. That’s R2.5bn. A two percent increase from 40 to 42 would give him R5bn. That’s very tempting as well. Politically, it would be easy to sell it.
What extra could Capital Gains Tax raise?
Well currently, the effective rate is 13.3 percent. Roughly, two percent increase in that effective rate would give him another R1bn, so that’s quite a nice income as well. He can easily lift that from 13.3 percent effective rate, to 20 percent. Then, that’s R3bn extra in the kitty. The same with the dividends tax: every one percent increase there would give him R1.4bn so he has a number of options on the top side with capital gains tax, dividends tax, and the top marginal rates.
And a 10c an increase in the fuel levy?
Yes, ten cents per litre extra, on the fuel levy, is quite a nice one as well. Just ten cents gives him more than R2bn. Fifty cents per litre gives him R10.5bn, so that’s nice as well. These are big numbers and the numbers we’ve mentioned thus far; already add up to more than R12bn. We’re hoping that he goes for slightly more than what he said in October, both on the revenue as well as on the expenditure side.
What would 1% rise in VAT add?
One percent in VAT is R15bn extra, so that is quite a nice kicker. Of course, two percent would then be R30bn.
It all sounds pretty easy to balance the books this year – with the lower oil price bringing even more breathing space…
Yes. Despite the fact that we’re talking about tax increases, the lower oil price is quite significant in terms of boosting consumer spending. With the petrol price fall that we’ve had of R4.00/litre thus far, it’s an extra R20bn in the consumer’s pocket. That is probably spread wider than what tax hikes would be spread. It’s a nice boost for the economy and that goes directly to other spending. Consumers aren’t likely to save that money that they get extra in a month. They’re going to spend that. That’s a big boost for the economy, which, in turn, will help tax revenues down the line.
What is the likely path that the Finance Minister’s going to take?Â
Nobody knows. I think it will be a mix of all those. I hope it’s more than R12bn because that will bring in the deficit quicker and we can talk about the positive/advantages of that. In terms of the numbers here, I still think VAT, despite it being politically difficult, is still in play. That’s still a possibility. In terms of the election cycle, we’ve had the big election. If they don’t raise VAT rates now, then they’ll have to wait until after the 2019 elections, so that is still in play. Maybe there’ll be a slight increase in the top marginal rate (one percent increase, from 40 to 41), maybe a slight lift in the capital gains tax, dividends taxes, and definitely something on the fuel levy. Last year we only had 12 cents/litre increase in the fuel levy. Maybe double that – 25 cents – easy. That’s R5bn. That’s a difficult one to call. It’s possible. Whether it’s that likely, I don’t know.
Take the marginal rate to 41 percent – that’s R2.5bn – and capital gains and dividend tax brings you in R5bn, with another R5bn from the fuel levy – still R2bn short of the R12bn.Â
Yes, there are normal tax increases in terms of the sin taxes. That’s easily made up of extra tax on cigarettes, tobacco, and alcohol etcetera. It would be similar to the amounts that we see year after year, and that could easily bring us above the R12bn.
So, there’s a bit of breathing space….
Yes, I think that’s fairly easy to do, politically and I think he might actually go for that.
VAT, as you say, if you’re going to take the political hard line, this is the time to do it because you might not have another opportunity. Â
Since we’ve had significant pressure from offshore last year with foreign investors as well as the ratings agencies, downgrading us with threats of more downgrades and putting our debt into territory where nobody would like to buy the debt. We’ve seen significant outflows from bond and equity investors so all of those things are putting lots of pressure on them. These investors and ratings agencies worry about our twin deficits: (1) our current account deficit as well as (2) the Budget Deficit. They worry about the Budget Deficit because more than 50 percent of Government expenditure is Government’s wage bill and Social Grants. That’s not sustainable. You can’t continue like that. It crowds out other spending that Government could potentially have done. Government knows that it needs to bring its Budget Deficit under control and after the global financial crisis, we’ve been moving roughly sideways in terms of our deficit.
We haven’t cut it significantly whereas other countries have. Now the pressure’s on them and I think they realised that pressure late last year. They have to cut this deficit significantly to show foreign investors that they’re serious about getting their fiscal side under control.
What about cutting Government spending?
Yes. They committed to that, fortunately. Of course, we need to keep watching that they’re actually doing that. Thus far, it looks like they are keeping spending under control, but it’s a good thing they’re matching revenue increases/tax increases with similar spending cuts. Should they continue to do that, it would be very positive and that would likely take some of the pressure of the ratings agencies away from us. We probably need to speed up that process – do a little bit more every time, than what we said before.
Is there anything on the horizon to help economic growth?
No. I think the Budget will help improve sentiment if it’s a good Budget. In terms of the way that I expect things to move, the Budget probably won’t help growth. Unfortunately, we’re stuck in an economy where two-and-a-half to three percent is probably the best we can hope for in the medium term. There are many structural issues regarding that, where Eskom is a big one as well. In terms of a cyclical environment – yes, this year will probably look a whole lot better than last year…however, still only two-and-a-half percent growth and then the risk of Eskom all the time. The Budget itself needs to keep moving in the right direction to make sure that this underlying improvement in our fundamentals (the current account and the fiscal side, etcetera) in terms of Eskom and the labour unions going on strike; it’s very difficult to sort that out in the Budget.
So until structural issues are being dealt with, the Budget can really just give us a bit of breathing space?
Yes, it can just do that, unfortunately. The Government’s Budget and the indication of what the plans are in terms of fiscal policy is very important. Policy guideline for foreign investors to watch… In which direction are we heading? The other part that comes in the Budget is how they’re implementing the National Development Plan. A plan we’ve all agreed is a fantastic plan but it needs to be implemented, and the budget is one area on which they focus a lot in terms of that implementation, so we look forward to seeing how the plan’s being implemented in the Budget and what the speed is by which it’s implemented. That plan will of course, help, but that’s also medium to longer term.
Are we at a point yet in South Africa where the realisation that inflexible labour legislation affects the economy, has actually dawned?
Yes, I think so. I think it’s dawned on everybody (policymakers included) that this is the big issue. Every time you talked about Davos and that Global Competitiveness Index that’s compiled for those meetings, it always shows that South Africa is the worst in the world in terms of all the labour issues, such as strikes and education, etcetera. At the point when our labour unions are probably at some of their weakest points in history, it’s probably an opportune time now for Government to change our labour laws as well. We need that political leadership. The realisation, as you said, is there but labour is the one big issue that’s impacting on us and if last year didn’t show us all that, then I don’t know what will. Yes, now is probably the time to do something about it.
