Tighten your belts, VAT is set to rise again

With Finance Minister Tito Mboweni ready to present his budget to parliament in a week, Stats SA’s announcement that consumer price inflation increased from 4% year-on-year in December 2019 to 4.5% in January means there could be another rise in value-added tax (VAT).

“There is no doubt an increase in the VAT rate will have an adverse effect on consumption and, therefore, economic growth,” said PricewaterhouseCoopers (PwC) economist Christie Viljoen.

“In addition, the increase will be acutely felt by the poor, for whom any increase in VAT translates into increased hardship,” said Viljoen.

“Although the increase in the 2018 budget resulted in a significant public outcry on the basis of the perceived regressivity of VAT, the pressure on the fiscus to raise revenue is likely to prompt a further increase in the VAT rate.

“We estimate that an increase in the rate from 15% to 16% will result in additional revenue of approximately R25 billion.

“Ideally, there should be no need to increase any tax rates, including VAT. But government currently finds itself in a situation where it will be forced to raise revenue from one or more of the major taxes, such as corporate and personal income tax, and VAT.”

Lullu Krugel, chief economist for PwC strategy, said the major driver behind the increase in inflation during January was transport costs.

“This was largely due to base effects in the year-on-year calculation as a result of the sharp drop in local fuel prices in December 2018 to January 2019.

“The ‘miscellaneous goods and services’ index also made a small contribution to the higher headline inflation reading, as inflation on the sub-component for financial services climbed from 3.6% year-on-year in December to 6.2% in January,” Krugel said.

Viljoen said an increase in the rate of VAT would be the least harmful to the overall economy. “With its ability to raise substantial amounts of revenue with relatively small tax increases, it should be the preferred instrument for raising additional tax revenues.”

Prices were going up, said Viljoen.

“The 4.5% year-on-year rate implies that the average consumer basket cost 4.5% more in January, compared to the same month last year,” Viljoen said. “Inflation will adversely affect spending if consumers’ rise in income does not keep pace with inflation. If consumer income increases, for example, by 3% over a 12-month period, people will be able to buy fewer goods with their pay cheques.”

But there was a glimmer: Krugel said the SA Reserve Bank’s monetary policy committee’s (MPC) January repo rate cut by 25 basis points (bps) to 6.5% was the second interest rate reduction in six months.

“The MPC said their improved inflation forecasts opened some space for additional monetary policy easing,” said Krugel. “The implied path of interest rates – as generated by the central bank’s quarterly projection model – indicate scope for another 25 bps cut in the repo rate later this year.”

– amandaw@citizen.co.za

For more news your way, download The Citizen’s app for iOS and Android.