1% VAT hike would have ripple effect - economists
Durban - Economists and consumer activists have cautioned against speculation that Finance Minister Tito Mboweni will introduce another 1% VAT hike in his Budget speech next Wednesday, saying the ripple effect of such a move would hit consumers’ pockets hard and further dampen economic growth.
Economists expressed mixed views on whether the minister would actually make the move, but warned that the effect of a mooted VAT increase, coupled with a possibly higher-than-inflation increase in the fuel levy of between 15c and 50c, would reduce consumer spending, leading to mass retrenchments and further pressure on the retail sector.
PricewaterhouseCoopers economist Christie Viljoen said the firm believed it was “more than likely” that VAT would be increased. He said if the minister had addressed the public sector wage bill by implementing a wage freeze during the current financial year, it would have resulted in a saving of around R46 billion, cutting the deficit to 5.4% of GDP.
“Consumers will need to fork out a little bit more money every time they go to the shops. Businesses, who generally pass on the VAT burden to consumers, will see shoppers being more hesitant to spend due to the overall increase in the cost of their shopping basket,” Viljoen said.
He expected any increase in the fuel levy to be in the region of approximately 15c a litre, as it may not be seen as a viable option for the government to raise additional revenue.
Efficient Group chief economist Dawie Roodt estimated the government’s net fiscal deficit was between R60bn and R80bn - 6.9% of GDP.
Roodt said he did not expect the government to raise VAT to fund the deficit because of Cosatu’s vehement opposition to the move.
However, he said if the government did raise VAT it would have to justify the hike to the poor by introducing a super tax of around 55% on people earning more than R5million.
Alternatively, it would need to introduce an additional VAT tax rate of 20% on luxury goods like televisions. He said he expected a 50c a litre hike in the fuel levy.
Pietermaritzburg Economic Justice and Dignity Group programme co-ordinator Mervyn Abrahams said his organisation was opposed to a VAT hike, as consumers were already paying R228.70 VAT on a basic basket of 34 items that cost R3223.49.
He said the below inflation increase of 3.8% in the national minimum wage, gazetted on Wednesday, which rises from R20 to R20.76 on March 1, coupled with higher VAT, fuel and electricity prices would reduce consumers’ retail spending, leading to lower demand and retrenchments.
SA National Consumer Union vice-chairperson Clif Johnston said consumers could not absorb another 1% VAT hike and higher fuel levy, especially since salaries would not rise sufficiently to compensate.
“Consumers are very hard pressed at the moment, and either of those increases will have a knock-on effect. Businesses will try to put prices up by 16%, but they won’t get away with it.
“There will be a short-term shock that will be extremely negative on consumers and the market, but eventually the market will sort itself out,” Johnston said.
He said if VAT was not increased consumers should brace for other forms of indirect tax hikes, such as increases in duties and the price of municipal services.