Cost crisis: Is zerorating the answer?
Rising food prices are straining the poor but more targeted relief might have a greater impact
Food prices have become painfully high, but — contrary to a recent demand by the Democratic Alliance (DA) — zero-rating more grocery items won ’t necessarily unburden poorer households as much as more targeted relief would.
Last month, the official opposition made a call to the government to use tax policy to rein in high food prices.
The DA wants, among other taxrelated interventions, the government to scrap value-added tax (VAT) on food items most commonly purchased by the poorest. Doing so would entail reviewing and expanding the zero-rated food baskets.
The current VAT system allows for 21 basic food items to be taxed at 0%.
Considering the current price environment, the DA’S demand sounds attractive. Inflation rose to 7.8% in July, before easing slightly (to 7.6%) in August, and is expected to average above the South African Reserve Bank’s 6% ceiling this year. Food and fuel prices typically remain the key inflation drivers. This year, consumer food price inflation has soared to its highest level in five years.
Though producer price inflation also eased in August, manufactured food price inflation continued to move upwards, increasing by 15.4% year-on-year from 15.1% previously.
Data collected by the Economic Justice and Dignity Group shows just how big an effect elevated food prices has on households. Its most recent household affordability index says the average cost of the food basket was R4 805.86 last month — a R30 increase compared to August. Year-on-year, the average cost of the household food basket grew by R586.39 (an increase of 13.9%).
Though zero-rating more foods seems like a good solution, economist Ingrid Woolard said this intervention wasn’t always targeted towards benefiting poorer households. She led a panel in 2018 to review the current list of zero-rated items.
Woolard noted chicken was a good candidate for zero-rating. However, the 2018 panel found, though chicken constituted 4.4% of the average expenditure by the poorest households, the VAT they paid was only R154 per year. In the richest households 0.5% of expenditure went to buying chicken but they paid R305 on VAT per year.
“It’s a tricky one. Because on the one hand, proportionately, there would be a bigger benefit to poorer households, so it would be a progressive policy. But in terms of a rand amount that benefits households, it does disproportionately go towards higher-income households. None of these things are perfect.”
On chicken alone, the government would end up foregoing revenue in the region of R3-billion, she said.
The best way to ensure relief is targeted is through direct cash transfers. The panel said, in theory, it would be cheaper to return the cost of the VAT increase to the poorest households than to extend zero rating.
“Commitments to increase expenditure on poor households in return for increasing their taxes have been implemented only in part, if at all”, the panel’s report noted.
“Moreover, neither in-kind programmes nor cash-transfer systems are designed to reach all poor households and especially the working poor,” the panel said.
The challenge is to ensure expenditure reaches the bulk of low-income households — a dilemma that has to be factored into the deliberations about the future of the R350 grant.