VAT hike may not affect rand power

ALTHOUGH the increase in VAT was likely to push up inflation, it was unlikely to have a major impact on the purchasing power of the rand, as reflected by South Africa’s Big Mac Index, according to economists.

Economists said on Friday that, while the increase in VAT would likely push up inflation, it was not likely to have a major impact on South Africa’s Big Mac Index.

The Big Mac Index is regarded as a simplified indicator for the purchasing power of an economy published by The Economist annually for more than 40 years. Since many countries have different currencies, the standardised Big Mac prices are calculated by converting the average national Big Mac prices with the latest exchange rate to US dollars. Inflation The average price for the Big Mac in South Africa is $2.40 (R27.66), while in the US it is $5.30 (R61.08).

Chief economist at ETM, George Glynos, said on Friday that preliminary studies show that inflation would be pushed higher by 0.5 percent.

“With inflation pushed higher, individuals will be forced to pay more, because the purchasing power of every rand in their pocket has declined. It is basically an erosion of their purchasing power,” said Glynos. He added that, generally, every increase in taxation used to fund government expenditure would impact on everything else.

Solidarity economic researcher, Piet le Roux, said they were opposed to an increase in VAT, just as they were opposed to an increase in tax, adding that the government should have cut its expenditure, which would have had the opposite effect of increasing purchasing power and economic activity.

“With regards to the Big Mac Index what we will see is that the purchasing power of South Africans is more likely to be negatively affected by the tax and the commercial expenditure increases.”

Le Roux said that did not mean there would be a big jump in inflation.

“What happens generally if the VAT or any other taxes increase it has a dampening effect – meaning that, even if the purchasing power of money stays more or less the same, fewer things are bought.

“So even if Big Mac skips, and people can buy less with their money, they can give up spending on something else. The other effect is the economy will see prices going down. Overall, the prices might balance out, but the overall effect is that people will be able to buy less with the money they have.”

Sanlam Investment Management economist, Arthur Kamp, said if your inflation (rate) was higher than another country, your currency would be weaker and, in the near-term, put up pressure in inflation.

“Over time, the Reserve Bank is going to look very closely into its inflation target. Its recent monetary policy statement, the assumption they are using, I think they want to go on inflation expectations lower than what they are now… Even though it can have a bit of an inflationary impact in the near-term, the Reserve Bank will keep the inflation low in the long-term,” said Kamp.

“What is more of an issue this year is a lot of people’s real income. Because inflation is going to be a little bit higher this year, this is going to show up in low, real-disposable income growth.”