Though this year’s Budget comes during significant political change and the prospect of another ratings downgrade, positive signs indicate that consumers could help drive the economy forward.
According to Standard Bank economist Dr Moolman, the man and woman on the street should experience lower inflation this year at an average of 4.4%. So, if wage growth is around 6.5%, it would mean real wage growth of about 2%. This should increase consumer spending in the coming year, in turn driving economic growth to a large extent – despite tax increases.
Unfortunately, wealthier taxpayers and those who enjoy alcohol, tobacco and cool drinks will be a little harder hit, according to our predictions. On the wealth tax front, estate duties could be increased from the current 20% to 30% alongside a similar increase in donation tax. This would yield an extra R1.5 billion in revenue. From April, the sugar tax bill will be implemented (possibly yielding additional revenue of about R1.5 billion), while normal sin tax increases on tobacco and alcohol should yield an additional R2.5 billion.
While many economists see a VAT rate hike as the quickest way to rake in more revenue for a stretched treasury, Dr Moolman doesn’t believe this is on the cards due to the 2019 election; VAT hikes negatively impact the poor and will be an unpopular move politically. Adjustments to increase the effective VAT rate are more likely.
According to Dr Moolman, it’s also possible to avoid a downgrade – for now. This comes as Moody’s rating agency is closely monitoring the political climate as well as the Budget before making further sovereign ratings decisions. However, it’s a very close call and will require decisive government action.
On the negative side, broad-based fiscal drag is becoming a greater concern every year, as tax brackets are not adjusted for inflation in the Budget, meaning people who earn a little more to keep up with inflation are dragged into a higher tax bracket and taxed accordingly. Only modest relief for the lowest income groups can be expected this year.
Dr Moolman cautions that it’s important to place the Budget in context after the Finance Minister signalled total revenue increases – including tax hikes and any assets that government can sell – of about R30 billion in the coming fiscal year. “So while the tax hike portion of the increases will weigh on the consumer, this is not the only area government is looking at. If last year’s tax hikes were estimated to be worth around R28 billion, and we get around R25 billion of hikes this year - with potential asset sales helping get to the R30 billion revenue increase estimate - then it is not more than what consumers faced last year.”