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The budget speech – what it could mean for you
donaldmogotsi
Community Coordinator
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For most of us, the key take-away of each year’s budget speech is how much more or less tax we will be paying, not necessarily how and why. But with Budget 2017 taking place on Wednesday this week, Standard Bank has put together an explainer that comprehensively breaks down what the average consumer could expect: 

 

  1. Bracket creep to disproportionately affect middle-income earners

Last year’s Medium-Term Budget stipulated tax increases to ensure that government revenue would rise by R28 billion for the 2017/18 tax year, and R15 billion in 2018/19. However, the recent rally in commodity prices and our forecast that GDP growth may accelerate to 1.4% this year, will buy South Africa more time before a VAT increase is required.

 

  1. VAT hike has a disproportionate effect on low-income earners

A VAT hike means a rise in living costs for all consumers, but the effect is felt more strongly by lower-income households. Household expenditure data from the BMR (Bureau of Marketing Research) shows that households earning below R89 000 per annum spend between 36% and 42% of their income on groceries.

 

  1. PIT weighs more on middle-income earners

GDP growth over the next three years is expected to remain below potential, thus unlikely to create new employment to broaden the tax base. This means growth in Personal Income Tax (PIT) revenue can only be achieved by higher taxes and/or bracket creep.

 

Bracket creep will affect the middle-income consumer disproportionately (those earning between R89 000 to R707 000 a year), because this segment’s majority (85%) relies more on salaries and wages as a primary source of income. In addition, this segment includes civil servant professions. Given that government 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.

 

  1. CIT tax to benefit from higher commodity prices

Due to the economic slowdown and fall in commodity prices, the contribution of Corporate Income Tax (CIT) to total tax revenue decreased. An increase in the CIT rate is seen as potentially counterproductive, since South Africa has reached the threshold above which additional increases may 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, recently resulting in better-than-expected CIT collections.

 

We expect current commodity prices to remain near current levels in 2017, having a positive effect on CIT revenue in the 2017/18 and 2018/19 fiscal years.

 

  1. Income gap narrowing

BMR data shows government’s fiscal policy has made progress in reducing income inequality. Currently, over 17 million South Africans receive social grants, with 24% of households relying on grants as their main source of income. We estimate that the ratio of average income in the lowest income group to average income in the highest income group declined by about 43%.

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