While interest rate hikes hit consumers where it hurts the most – their wallets – they are specifically enacted to stabilise and thus protect the economy, says Sonja Steyn, the head of Wealth Management Strategy at Consult by Momentum.
Steyn’s comments come at the back of the Medium Term Budget Policy Statement (MTBPS) tabled by Finance Minister Enoch Godongwana this week.
“By increasing the ‘cost’ of credit, consumers are deterred from borrowing to fund their expenditure, thus driving down goods demand and subsequently inflation. Unfortunately, consumers with existing debt – in the form of home loans, car repayments and clothing accounts, for example – are now paying a lot more for what they purchased," she said.
Steyn said that gGiven global macro-economic factors such as the Russia-Ukraine conflict (and now in Gaza), there has been a series of rate hikes over the past few months, which were, unfortunately, unlikely to be over, with another hike anticipated in November. Consumers were likely to only see some respite in the second quarter of 2024.
“The cost of oil and the recent outbreak of bird flu (which has affected access to and cost of poultry and eggs) are also driving up food and petrol costs, so the bad news is that consumers will remain under pressure for some time longer.
“As a result of this financial grip tightening for South Africans and their family units, individuals will be forced to fund rising costs from other sources like investments and savings, which will have further financial repercussions down the line.”
Steyn said the other impact iwa regarding tax collection, Momentum economists have noted:
• Gross tax revenues are running behind schedule based on collections between April and August 2023. This is largely owing to an underperformance in corporate income tax (CIT) collections.
• The South African Revenue Service (Sars) Tax Statistics report for 2022 showed that the mining sector acted as a large contributor to CIT previously. However, a slump in SA’s key exported commodity prices has probably driven the contribution lower.
• Personal income taxeshave outperformed due to a rise in nominal wages, in the public sector in particular, and modest employment gains across the economy.
• Domestic VAT has increased by 6.5% year-on-year (y/y) fiscal year to date. This is only marginally lower than the government’s February 2023 national budget full-year assumption of 6.7%. This highlights resilience in household spending despite elevated cost-of-living pressures facing consumers.
• Sars’s strategic intent to encourage voluntary compliance is also gaining momentum, with taxpayer behaviour improving and trust in Sars climbing further.
“So, a mixed bag. On one hand, individual compliance seems to be improving, but on another hand, corporate tax is underperforming, in part thanks to companies’ increasing cost base.
“The shortfall remains yet to be fully understood. The government is largely dependent on tax revenue, and if collection is insufficient, it will need to cut spending, increase borrowing and/or increase taxes to make up the shortfall,” she said.
Citadel chief economist and advisory partner, Maarten Ackerman said that while there were negative points in the Budget, “Other fairly positive points to take from the Budget is that government is saying it is making progress on addressing South Africa’s greylisting, and on a practical level the financial services industry is feeling the tightening of screws, however, some serious concerns remain, the greatest of which is that we have not seen any high-profile money laundering and fraud prosecutions yet.”
Some of Ackerman’s greatest causes for concern were the finance minister’s silence on how the government would be funding Transnet, the Covid-19 Social Relief of Distress grant, which is being extended to 2025, and the proposed National Health Insurance, which Parliament was pushing through.
“What is also concerning is that the government is not cutting wages and instead, is focusing on trimming non-wage spending, which is always tricky,” said Ackerman.