Bracket creep to unjustly affect middle-income earners
A VAT hike will mean a rise in the living costs of all consumers, but the effect will be disproportionately higher for lower-income households
LAST year’s medium-term Budget stipulated that tax increases were needed to ensure that government revenue would rise by an additional R28 billion for the 2017/18 tax year and a further R15bn in 2018/19. Given low economic growth, the finance minister faces tough choices. However, the recent rally in commodity prices, and our forecast that gross domestic product (GDP) growth may accelerate to 1.4 percent this year if commodity prices remain near their current levels, will allow National Treasury more room to manoeuvre and buy South Africa more time before an increase in VAT is required.
Effect of VAT hike on low-income earners
A VAT hike will mean a rise in the living costs (or a decline in the buying power) of all consumers, but the effect will be disproportionately higher for lower-income households. Household expenditure data from the Bureau of Market Research (BMR) shows that households earning below R89 000 a year spend between 36 percent and 42 percent of their income on food and beverages.
PIT weigh more on middle-income earners
GDP growth over the next three years is expected to remain structurally below potential and is unlikely to create adequate new employment to broaden the tax base. Standard Bank Research’s forecast is for 108 000 net job losses this year. Growth in personal income tax (PIT) revenue can be achieved only by higher taxes and/or bracket creep. Bracket creep will affect the middle-income consumer disproportionately – that is, those earning R89 000 to R202 500, R202 500 to R412 000 and R412 000 to R707 000. This is because the middle segment relies more on salaries and wages as a primary source of income, compared with the low-income and affluent-earning groups. Data from BMR shows that about 85 percent of households in the middle segment rely on salaries and wages as their primary source of income, compared with 48 percent in the low-income group and 75 percent in the affluent-earning group.
In addition, this segment encapsulates major civil servant professions such as teachers, nurses and social workers. Given that government is cutting back on its wage bill, the purchasing power of this group is at risk. Furthermore, debt levels are higher among the middle segments than among low and affluent earners. The middle segment comprises 32.3 percent of the population and contributes 62 percent to total expenditure.
CIT and higher commodity prices
As a result of the economic slowdown and, specifically, the fall in commodity prices, the contribution by corporate income tax (CIT) to total tax revenue has been falling in recent years, from 21 percent in 2011/12 to 18 percent in 2015/16. An increase in the corporate tax rate is seen as potentially counterproductive, because South Africa is believed to have reached the threshold above which additional corporate tax increases are likely to have a negative effect on the revenue collected. However, the recent commodity price rally has boosted the earnings of major tax-contributing corporates in the mining sector, resulting in better-than-expected corporate tax collections in recent months.
Whereas in 2013/14 mining and quarrying contributed 9 percent of corporate tax revenue, or R15bn, as commodity prices plummeted, the sector’s contribution fell to 3 percent of CIT, or R3.2bn, in 2015/16. We expect commodity prices to remain near their current levels this year, and this should have a positive effect on CIT revenue in the 2017/18 and 2018/19 fiscal years.
Income gap narrowing, although still elevated
South Africa continues to have one of the highest levels of inequality in the world. However, from BMR data it appears that government’s fiscal policy, which redistributes wealth and income via social grants, as well as an increase in public sector employment, has made some progress with respect to reducing income inequality.
Over 17 million South Africans receive social grants, and about 24 percent of households rely on grants as their primary source of income. We estimate that the ratio of average income in the lowest income group (R0 to R20 500 a year) to average income in the highest income group (R2 414 001-plus a year) declined by about 43percent, from 1:8086 in 2011 to 1:4578 in 2016. That is, in 2011, on average for every R1 earned by an individual in the lowest income group, an individual in the wealthy income group earned R8 086. In 2016, we estimate this to have moderated to R4 578 for every R1. Siphamandla Mkhwanazi is a Standard Bank economist.