Effect of tariff increase on residential sector preliminary results. Dr Johannes C Jordaan

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1 Effect of tariff increase on residential sector preliminary results Dr Johannes C Jordaan

2 Scope Impact on residential sector (i.e. households) Impact of: nominal tariff increases, 2x25% in 2013 and 2014 and inflation in 2015 and 2016; nominal tariff increases, an alternative of 3x18% in and a CPI increase in 2016; an increase in the VAT rate to account for the same amount (2x25%) between 2013 and 2016, and an increase in the personal and corporate income tax rates to account for the same amount (2x25%) needed between 2013 and 2016.

3 Background Household expenditure on electricity as % of total expenditure 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Lower Upper 6,000 5,000 4,000 3,000 2,000 1,000 - Rand per year % I&E 2005/06 % LCS 2008/09 Average % I&E Average % LCS Average (R) LCS Average (R) I&E

4 Methodology Social accounting multiplier analysis (using a SAM with a Leontief inverse matrix). = identity matrix = Demand vector (how much, in for example rand terms, is the change in demand by consumers).

5 Methodology advantages and disadvantages Analyses of economy, as an interconnected system, is possible (direct and indirect affect); Easier to use than CGE modelling; Built using 2009 data (before recent tariff increase); Multipliers -linear relationship (constant returns to scale, no substitution effects); System is assumed to be in equilibrium, no considerations is given to price effects; No capacity constrain in the model.

6 Assumptions: Tariff increase Assumptions: Reduction in household and business expenditure is equal to the size of the tariff increase; This reduction in expenditure (lower demand) is weighted according to the 2009 expenditure on electricity (for both households and businesses); No provision has been made for a decrease in electricity consumptions as a result of the price increase (price elasticity of demand); No provision has been made for block tariff changes; According to the SAM, households share of electricity tariffs is 26.4% and businesses' share is 73.6%; Using data from the SAM, a R100 billion rand increase in the tariff will result in a 112% increase (for all). Note: R100 billion is assumed for this presentation The final research and presentation will have the calculated real increases.

7 Assumptions: income tax increase (CIT and PIT) Assumptions: A rand amount is calculated per sector for CIT given the current profit per sector and the share of CIT payable (in 2009); A rand amount is calculated per income group for PIT given the current share of PIT paid, income per education group is decreased given the share of PIT payable (in 2009); A reduction in income will result in a decrease in demand; Income tax is 60% of government revenue; According to the SAM households pay 56% of income tax and business 44%; For R100 billion, Corporate tax rate will have to increase with 15% (from 28% to 32%) (or 26.5% effective from 15.7% to 26.5%) Personal income tax rate (effective) will have to increase with 26.5%

8 Assumptions: VAT Assumptions: A relative effective percentage VAT is calculated per sector (sales tax) and combined with household expenditure per sector (for each household income group); It is assumed that households carry the full VAT burden; No provision has been made for changes in elasticities per sector; Sales tax are 30% of government revenue; For R100 billion VAT rate increase with 52.9% (from 14% to 21.4%) (only looking at sales tax)

9 Preliminary results: Impact of R100 billion (excluding Eskom tax impacts) Tariff Income tax VAT GDP 2009 (Rm) Total implied employment Direct impact (Rm) GVA (Rm) Householdexpenditure GVA as a % of GDP -6.12% -7.97% -4.80% Employment % % % Highly skilled % % % Skilled % % % Semi-skilled and unskilled % % % Formal % % % Informal % % %

10 Preliminary results: Impact of R100 billion Factors of Production: Labour Tariff Income VAT Labour with primary school education (grades 1-7) -6% -8% -5% Labour with middle school education (grades 8-11) -6% -9% -4% Labor completed sedondary school education (grade 12) -5% -10% -4% Labor with tertiary education (certificates, diplomas or degrees) -5% -11% -4% Households Decile 1-5% -5% -10% Decile 2-6% -5% -10% Decile 3-6% -6% -10% Decile 4-7% -7% -11% Decile 5-7% -7% -11% Decile 6-7% -8% -11% Decile 7-7% -8% -10% Decile 8-7% -8% -10% Decile 9-7% -9% -9% Decile 10-7% -9% -9%

11 Agriculture Forestry Fisheries Coal mining Other mining Food processing Beverages & tobacco Textiles Wearing apparel Leather products Footwear Wood products Paper products Printing & publishing Petroleum products Basic chemicals Other chemicals Rubber products Plastics Glass products Other non-metallic minerals Basic iron & steel Non-ferrous metal Metal products General purpose machinery Electrical machinery Radio & television equip. Medical equipment Vehicles & parts Other transport equipment Furniture Other manufacturing Electricity & gas distribution Water distribution Construction Wholesale & retail trade Hotels & catering Transport Post & communications Financial services Insurance & pensions Real estate activities Research & development Rental services Other business activities Public administration Education Health Other services Sector impacts Tariff Income VAT Agriculture Forestry Fisheries Coal mining Other mining Food processing Beverages & tobacco Textiles Wearing apparel Leather products Footwear Wood products Paper products Printing & publishing Petroleum products Basic chemicals Other chemicals Rubber products Plastics Glass products Other non-metallic minerals Basic iron & steel Non-ferrous metal Metal products General purpose machinery Electrical machinery Radio & television equip. Medical equipment Vehicles & parts Other transport equipment Furniture Other manufacturing Electricity & gas distribution Water distribution Construction Wholesale & retail trade Hotels & catering Transport Post & communications Financial services Insurance & pensions Real estate activities Research & development Rental services Other business activities Public administration Education Health Other services Agriculture Forestry Fisheries Coal mining Other mining Food processing Beverages & tobacco Textiles Wearing apparel Leather products Footwear Wood products Paper products Printing & publishing Petroleum products Basic chemicals Other chemicals Rubber products Plastics Glass products Other non-metallic minerals Basic iron & steel Non-ferrous metal Metal products General purpose machinery Electrical machinery Radio & television equip. Medical equipment Vehicles & parts Other transport equipment Furniture Other manufacturing Electricity & gas distribution Water distribution Construction Wholesale & retail trade Hotels & catering Transport Post & communications Financial services Insurance & pensions Real estate activities Research & development Rental services Other business activities Public administration Education Health Other services

12 Questions Calendar years vs tariff periods ; Effective % tariff increases (Redistributor/ municipality); Constant prices vsreal prices (monetary illusion impact of inflation); R153 billion from tax recycling? Given model limitation period of impact estimation.

13 Thank you

Chapter 4 THE SOCIAL ACCOUNTING MATRIX AND OTHER DATA SOURCES

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