Taxing times bring desperation and debt
Since April 1 South Africans have had to deal with the practical realities of the austerity budget presented by former finance minister Malusi Gigaba in February. Its most pervasive features — the increase in value-added tax (VAT), the levy on fuel and sin taxes — have finally hit the pockets of all citizens and made dents in their disposable incomes.
To alleviate the burden of the VAT increase on the poor, the government has committed to assessing the possibility of expanding the basket of zerorated food items. At present only 19 items qualify for this concession, mainly the core of the staple diet of poor citizens. The problem, however, is that with the exception of unprocessed goods, the zero rating applies at the final product level rather than at primary input level. Brown bread is zero-rated, for example, but its primary inputs — flour, water and electricity — remain standard-rated.
As a consequence, the increase in VAT from 14% to 15% will have knock-on effects on the production value chain.
The review might end up with a longer list of zero-rated items, but for as long as parts of the supply chain involve standard-rated inputs, consumers will never be fully insulated from a VAT increase.
Until such a review exercise is completed, citizens have to adjust their spending patterns or seek ways to boost incomes to insulate themselves from the effect of these new measures.
However, most households have little scope for adjusting their spending patterns as they already live on the margins, with little cash left over after core expenses. And in a climate where economic growth and wage inflation remain very low, there isn’t much hope of boosting incomes either.
This leaves us with the possibility of debt becoming a bigger feature of household budgets in these trying times. As it stands, like the national fiscus, South Africans remain highly dependent on debt to cover their living costs. Recent data show that more than 70% of household income goes towards servicing debt. SA also spends more than 15% of revenue towards debt service costs. While the state has the ability to simply leverage its existing fiscal instruments to raise more revenue to keep it afloat, ordinary citizens aren’t as lucky.
Household credit plays an increasingly important role in the economic cycle.
There is naturally the risk that households will overcommit and find themselves drowning in even deeper debt. Since 2006 the National Credit Act has played a role in mitigating this possibility.
One of its key features is the requirement for affordability tests to be conducted on prospective borrowers before credit is extended. This serves to protect the lender and borrower from reckless lending.
One way to assess a client’s affordability is the use of recent historical data — bank statements and payslips.
However, the High Court in Cape Town recently declared such requirements unlawful since they discriminate against those outside the traditional job market or banking system.
The court identified that the requirements should only exist to curtail reckless credit. However, the way they are written has the unintended consequence of preventing access to credit altogether for citizens who are unable to produce the required documentation. Consumers who are likely to fall foul of such requirements are the poor.
It is also these people who are likely to depend on credit in times of economic hardship.
Consequently, while the judgment has legal merit, it also poses the risk of creating a bubble in the household credit market, which we all need to watch out for.
Sithole (@coruscakhaya), a chartered accountant, academic and activist, chaired the Lesedi Education Endowment Fund as part of the #FeesMustFall campaign. He writes in his personal capacity.