With Budget 2017 taking place on tomorrow (22 February), Standard Bank economist, Siphamandla Mkhwanazi takes a look at what it could mean for the consumer.
Bracket creep to disproportionately affect middle income earners
Last year’s Medium Term Budget stipulated that tax increases were needed to ensure that government revenue rise by an additional R28-billion for the 2017/18 tax year and a further R15-billion in 2018/19. Given low economic growth, the Finance Minister will face tough choices. However, the recent rally in commodity prices, and our forecast that GDP growth may accelerate to 1,4% this year if commodity prices remain near current levels, will allow Treasury more room to manoeuvre and buy South Africa more time before a VAT increase is required.
VAT hike has a disproportionate effect on low income earners
A VAT hike means a rise in the living costs (or a decline in buying power) of consumers across the economy, but the effect is disproportionately higher for lower income households. Household expenditure data from the BMR shows that that those households earning below R89,000 per annum spend between 36% and 42% of their income on food and beverages.
PIT weigh more on middle income earners
GDP growth over the next three years is expected to remain structurally below potential, and is unlikely to create adequate new employment to broaden the tax base. SBR’s forecast is for 108 000 net job losses in 2017. Growth in personal income tax revenue can only really be achieved by higher taxes and/or bracket creep.
Bracket creep will affect the middle income consumer disproportionately, such as those earning R89 000 – R202 500, R202 500 – R412 000, and R412 000 ¬¬- R707 000. This is because the middle segment relies more on salaries and wages as a primary source of income, compared to low and affluent income groups.
Data from BMR shows that about 85% of households in the middle segment rely on salaries and wages as their primary source of income, compared to 48% in the low income group and 75% in the affluent earning group.
In addition, this segment encapsulates major civil servant professions such as teachers, nurses, social workers. Given that government, the country’s largest employer, is currently scaling down on its wage bill, the purchasing power of this group is at risk.
Furthermore, debt levels are higher among the middle segments than for low and affluent earners. The middle segment comprises 32,3% of the population, and contributes 62% to total expenditure.
CIT tax take to benefit from higher commodity prices
Due to the economic slowdown and specifically to the fall in commodity prices, CIT’s contribution to total tax revenue has been falling in recent years (from 21% IN 2011/12 TO 18% in 2015/16). An increase in the corporate tax rate is seen as potentially counterproductive since South Africa is believed to have reached the threshold above which additional corporate tax increases are likely to have a negative effect on revenue collected.
However, the recent commodity price rally has boosted earnings of major tax-contributing corporates in the mining sector, resulting in better than expected corporate tax collections in recent months.
Whereas in 2013/14 the mining and quarrying contributed 9% of corporate tax revenue (CIT), or 15-billion, as commodity prices plummeted the sector’s contribution fell to 3% of CIT or R3,2-billion in 2015/16. We expect current commodity prices to remain near current levels in 2017 and that this should have a positive effect on CIT revenue in the 2017/18 and 2018/19 fiscal years.
Income gap narrowing, although still elevated
South Africa continues to have one of the highest levels of inequality in the world. However, from BMR data it appears that government’s fiscal policy, which redistributes wealth and income via social grants as well as an increase in public sector employment via the expanded public works and other programmes, has made some progress with respect to reducing income inequality.
Currently, more than 17-million South Africans receive social grants, and about 24% of households rely on grants as their primary source of income.
We estimate that the ratio of average income in the lowest income group (R0-R20 500 per annum) to average income in the highest income group (R2 414 001+ per annum) declined by about 43%, from 1:8086 in 2011 to 1:4578 in 2016. That is, in 2011, on average for every R1 earned by an individual in the lowest income group, an individual in the wealthy income group earned R8 086. In 2016, we estimate this to have moderated to R4 578 for every R1.