The CO2 tax on new vehicles is a good tax to temporarily discontinue to stimulate demand for new vehicle sales following the severe impact of the Covid-19 pandemic, an automotive conference heard on Wednesday.
National Association of Automobile Manufacturers of South Africa (Naamsa) vice president and MD of Ford South Africa and sub-Saharan Africa Neale Hill said this is because the discontinuance of the CO2 tax will have a limited effect on emissions without any change in fuel quality.
Naamsa commissioned B&M Analysts to conduct a study to investigate and make recommendations on how best South Africa can stimulate demand for new vehicle sales, production and the entire automotive value chain because of the impact of Covid-19, Hill told the HyperMobility virtual conference organised by Messe Frankfurt South Africa and Naamsa.
Hill said that in terms of recommendations, the primary focus was on stimulus interventions that are fiscally neutral and that it only considered tax-based support mechanisms and an amendment to the treatment of value-added tax (Vat) as part of the leasing options.
“Based on our modelling of the government’s net fiscal position, this would improve by R1 billion, with the industry benefitting from an additional 11 756 units of sales.
“An ad valorem tax reduction will have the most significant impact, given price elasticity in the market,” said Hill.
“Based on our modelling, the government’s net fiscal position based on a reduction of the ad valorem rate from 0.0003 to 0.000022 would remain unchanged, with the industry benefitting from an additional 16 635 units of sales,” he said.
Hill added that the removal of the upfront payment or capitalisation of Vat for private lease finance agreements would allow for the monthly payment of Vat as per rental agreements, which would attract more private purchasing through leasing.
He said an optimistic economic forecast is for a V-shaped recovery globally and for South Africa and new vehicle sales to rebound sharply from the extreme lows recorded in 2020 – although expectations are for the new vehicle market to only achieve the pre-Covid-19 market level “by 2022 and onwards”.
Absa chief economist Jeff Gable told the conference the South African economy is only expected to get back to the same level it was in 2019 in late 2024 or 2025.
“The impact of Covid-19 is substantial and is going to be long lasting,” he said.
Gable stressed that investment is necessary for the economy to grow going forward but any recovery in the economy will be private sector-led because of the poor state of government finances.
He said that in the same way businesses only invest when they feel confident, households will tend only to spend discretionary income if they feel more confident.
Consumer confidence is very weak and high income consumers are no exception, with large discretionary expenditure associated with the vehicle industry, he said.
“For the first significant time since the mid-1990s, wealthier households in South Africa say they are worried about their financial position.
“You can have significant incentive programmes, interest rates that are at 50-year lows, but at the end of the day, a big-ticket purchase – something like a vehicle – is also a high-confidence purchase as well,” he said.
Gable questioned how much of the recovery in new vehicle sales recently is a “catch-up” from the two to three months when there were very few sales and how much of this recovery is a direct response to other factors, such as lower interest rates.
Hill said new vehicles sales declined by 33.4% in the first nine months of 2020 compared to the same period in 2019, while vehicle exports declined a massive 37.5% over the same period.
New vehicle sales reflect the state of the economy
“Due to the close correlation between new vehicle sales and the economic growth rate in the country, the pre-Covid-19 projections were for new vehicles sales in South Africa to decline by about 3% in 2020 due to the pre-existing recessionary economic climate in the country.
“As a result of the Covid-19 impact, projections are now for a 30% decline in overall new vehicle market sales – 10 times more than the initial projection – while vehicle exports and subsequent vehicle production is also anticipated to decline by about 30%,” he said.
Hill said 2020 is already the worst new vehicle market in South Africa in 10 years and a recovery will depend on how quickly the economy can break out of its low growth trap and how soon society will recover from the Covid-19 lockdown.
“Under normal circumstances, positive factors such as the 300 basis points interest rate cuts, dealer incentives and low inflation would be expected to support the new vehicle sales market.
“An important avenue for the government to support this key corona-hit sector of the economy is to reduce taxes on new vehicle purchases and to stimulate new vehicle sales,” he said.