Budget has more gain than pain

Without the increase in VAT, it’s almost certain there would have been another ratings downgrade, which would be even more punishing for consumers. reports

DON’T focus on a few negative items; look at the Budget in its totality. That was the message Finance Minister Malusi Gigaba had for journalists at a press briefing on his Budget speech, which he presented in Parliament on Wednesday.

Although some aspects may cause pain – and the wealthier you are, the more pain you’ll feel – if you view them in the context of the Budget as a whole, you will find they are offset by benefits, direct or indirect.

The main benefits the government hopes will flow from “making some tough decisions” in producing the Budget are stronger economic growth and averting another credit ratings downgrade. There are also specific benefits aimed at the poor, and greater support for small business.

What may surprise you were the things that did not happen: no changes to capital gains tax, dividends tax, or to the taxes, limits and allowances relating to interest income, retirement fund savings and tax-free savings accounts, among others.

The main tax-related features of the Budget that will affect you directly as a consumer are:

VAT INCREASE

A single-percentage-point rise in value-added tax (VAT), from 14% to 15%, to take effect on April 1, will bring in about R23 billion for the government.

David Crosoer, an investment analyst at PPS Investments, says the increase will result in a onceoff increase in Consumer Price Index inflation of at least 0.5% over 12 months. “It’s unlikely that a stronger rand will offset this inflationary impact,” he says.

How much extra you pay will depend on what percentage of your consumer basket comprises zero-rated items, Crosoer says. “In a worst-case scenario, it’s unlikely to be more than 0.9% of your expenditure.”

He says the government had little choice but to raise VAT “to plug a gaping expenditure hole. Were this not implemented, South Africa would have faced the real possibility of further ratings downgrades and the potential significant depreciation of the rand. This would have had an adverse impact not only on the government’s ability to borrow, but also an inflationary impact on South African consumers more detrimental than the VAT hike.”

Hermann Marais, an associate at law firm Bowmans, says the increase in the VAT rate may not hit lower-income consumers as hard as was feared.

He says that, if you look at the average annual expenditure of households that Statistics SA categorises as “poor” in its 2017 Poverty Trends, various categories of expenditure are not subject to VAT. These include fuel (the average transport cost is R3 957 a year) and housing costs of R6 966 a year (mortgage bond repayments and rent are exempt from VAT).

“Basic foodstuffs, too, are zero-rated. They include brown bread (but no longer rye and lowGI bread), dried beans and other legumes, maize meal, milk, amasi, rice, fresh fruit and vegetables, eggs, vegetable oil and tinned pilchards. These items make up at least 46% of the normal food purchases of the average poor household, according to Statistics SA,” Marais says.

Marais says the removal of the VAT zero-rating on fuel, as was proposed in the 2017 Budget Review, would have dealt a far greater blow to lower-income consumers. “If this had happened, the cost of fuel would have risen by 14%, with knock-on effects on the prices of goods that are transported. Consumers would have been hit hard, especially commuters making use of public transport and taxis,” he says.

Johann Els, the senior economist at Old Mutual Investment Group, believes the VAT increase is not inflationary and will not drive up prices in general, nor will it particularly hurt the poor.

He says although VAT is generally assumed to tax the rich and the poor equally, the wealthiest 30% of people pay 85% of all VAT in South Africa. He says a fully VATable basket of goods costing R100 will, after the increase to 15%, cost 88 cents more.

Els regards the VAT increase as positive and evidence that the government is “willing to make tough choices”.

INCOME TAX BRACKET CREEP

The government will again employ a stealth measure used last year: bracket creep or fiscal drag. This refers to the income tax brackets “dragging” behind inflation.

If you are a middle-income earner who has recently had an inflation-linked pay increase, bracket creep may hurt, because a larger percentage of your income is likely to go to the taxman. If you haven’t had an increase, you will pay slightly less tax, but, in both cases, you will be taking home less in real (after-inflation) terms.

The lowest four income tax brackets (see the tables on

have been partially adjusted for inflation, through a 3.1% increase. The top three brackets remain the same as last year – they have not been adjusted at all.

Linked to the income tax brackets are the primary, secondary (for people aged 65 to 74) and tertiary (for people of 75 and older) rebates. These have also been subject to below-inflation adjustments: 3.17%, 3.8% and 3.25% respectively.