Africa-Press – South-Africa. Old Mutual Investment Group (OMIG) thinks the National Treasury has room to extend the R3 cut in the General Fuel Levy for a prolonged period beyond three months.
This is because the government can be relatively sure of a revenue overrun from bumper corporate income taxes from mining companies and has some fiscal space to play with.
However, the relief cannot last forever and will come at the cost of slower improvement in state finances, potentially lower infrastructure investment, and limited wage hikes.
OMIG senior analyst Sisamkele Isipho Kobus explained that the Finance Minister has more room than many think, should he choose to use additional revenue to offer relief to South Africans.
Currently, Finance Minister Enoch Godongwana has made it clear that the state has limited room to offer sustained petrol price relief, with the National Treasury reviewing the R3 cut on a monthly basis.
The cut is set to expire on 5 May, with the Treasury running the numbers on whether the relief should be extended for potentially another two months.
Kobus said the R3 cut not only has a material impact on the price of fuel at the pump but will also help contain inflation, potentially shaving off 0.2 percentage points.
The current level of relief is costing the government R6 billion per month in revenue from the General Fuel Levy.
Over three months, the cost will rise to R18 billion, which Kobus said the National Treasury can absorb at a stretch. To sustain it for a year, based on historic fuel consumption, the government will lose R70 billion in revenue.
Kobus said the R18 billion price tag for three months of relief will see the state’s financial buffers play their role, limiting the impact on the budget surplus.
In this scenario, Kobus estimated that the relief will narrow the primary surplus by 0.2% of GDP and slightly widen the full budget deficit.
However, this is not the blowout many feared at the beginning of the conflict, with the state slightly better prepared than in 2022, thanks to increased tax revenue from mining companies and better management of the fiscus.
R40 billion in relief on the cards
The relief story may not end in the next three months, with the National Treasury able to free up more funds if needed.
Kobus made it clear that OMIG do not expect oil prices to return to their pre-war levels anytime soon, even if there is a sudden end to hostilities and a peace deal.
OMIG’s base case is for oil to remain elevated for the next nine months to a year, with oil settling at betwee $90 per barrel and $100 per barrel.
The upshot is that more relief from the government may be necessary, with oil prices set to remain higher for longer.
Relief can also take different forms. It may not necessarily be sustained cuts to fuel levies, but rather alterations to social grants or other parts of the social wage.
Kobus explained that the National Treasury was very conservative in its revenue outlook for the current financial year.
OMIG’s data indicates that additional tax revenue from the mining industry is likely to cross R40 billion in the current financial year.
This would ordinarily significantly boost the state’s financial health, enable it to post a wider primary surplus, and stabilise its debt burden.
However, Kobus explained that this time around, there will be some temptation to offer further relief to South African consumers amid elevated oil prices.
Were the state to use the R40 billion overrun from the mining industry to offer relief to South Africans, it could extend the R3 cut to the fuel levy by six months.
This situation would have a neutral impact on the state’s finances, effectively shifting the overrun towards the fuel levy relief.
As a result, it would not have to tap its buffers or capital markets, or move money around from other areas of the budget.
However, it will come at the cost of being yet another example of the excess revenue generated by a commodity boom being used to fund short-term expenditure rather than long-term growth.
The additional revenue should ideally be spent improving the state’s finances or investing heavily in infrastructure to drive future growth.
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