Independent economist Dawie Roodt says that South Africans will simply not stand for an increase in value added tax (VAT), should it be proposed in 2016.
VAT is an indirect tax levied on most transactions, and is presently at 14% of the sales price in SA.
It is widely expected that the government will raise the VAT rate rather than increase income tax rates following the release of an interim report on VAT by the Davis Tax Committee in July last year.
The committee, headed by Judge Dennis Davis, said that raising VAT would be a more efficient way of boosting revenue than increasing direct taxes, Reuters reported.
It said that hiking personal or corporate tax rates would cause less inflationary pressure, although there would be a negative impact on real GDP and employment.
“It is thus clear that from a purely macroeconomic standpoint, an increase in VAT is less distortionary than an increase in direct taxes,” the committee said.
Neil Roets, CEO of debt management firm Debt Rescue, said that government is between a rock and a hard place because it is unable to balance its budget by cutting state spending while taxes do not cover the shortcomings in the budget.
“Corporate tax is already among the highest in the world and it would severely impact the economy if Pravin Gordhan decides on an increase in this sector,” he said.
Independent economist Dawie Roodt said tax on individuals had also pretty much reached its limit because there are simply not enough rich people in the country to fund an increase.
“What we are left with is VAT and while this would be the most equitable tax because it taxes everybody, the mainly black and poor electorate will simply not stand for this.”
Roodt said the same tactics that brought the government to its knees on the issue of university fees would be used to put a stop to an increase in VAT.
“We will see riots the likes of which have never been seen in this country if government increases VAT even by a modest amount.”
Emerging markets economist Peter Montalto of Nomura said that a VAT hike in February seems unlikely before the local elections.
However, Roets warned of a number of other increases in the pipeline in 2016 that will impact consumers who are already vastly over indebted.
Data from the World Bank showed that, on average, two in five people around the world took out a loan in 2013-14, with South Africa being the world’s number one country for people needing loans.
As many as 86% of adults in the country took out loans during that year, ahead of Iran (80%), Uganda and Kenya (79%), Niger (71%) and the Philippines (70%).
“Eskom wants to hike electricity prices again and has made a submission just in time for the festive season that economist Mike Schussler says may lead to a 17% increase next year,” Roets said.
Debt Rescue said that despite government’s promise to universities that it will not increase fees in 2016, this will not affect school fees.
“The unemployment rate of 25.5% is also indicative of the fact that it is belt-tightening time for consumers.
“Our massive unemployment rate which in reality is closer to 40% if people who have given up looking for jobs are taken into account, accentuates the reality that all South Africans are in for a very rough ride.”
Finance Minister Pravin Gordhan is also expected to raise the general fuel levy in his budget speech next month, with that tax having increased 30.5 cents a litre in 2015.
Investment Solutions chief economist Lesiba Mothata also warned of higher interest rates this year.
He told Business Day: “The Reserve Bank will likely change the magnitude of rate hikes this year from 25 basis points — the level effected twice last year — to 50 basis points “because the feed through from a depreciating currency is going to be more pronounced than what the Bank has priced in, particularly in the fourth quarter.”
Nomura’s Montalto said that Sarb’s monetary policy committee (MPC) is likely to hike the repo rate by 50 basis points (bp) to 6.75% in January.
This is “to account for the sharp weakening of the currency’s risks into second-round effects, some outflow (though less than might otherwise have been expected from such a political and credit risk premia shock) and with inflation expectations grinding higher,” said Montalto.
Nomura expects a 50bp increase in January, 25bp in March, 50bp in July and then 50bp in November.
Roets said said the fact that most consumers owe more than 75% of their monthly salary cheques to financial institutions shows just how dire the situation actually is.
“There is no way to put a positive spin on these figures. The country is broke, consumers are broke,” he said.
Roets said his company was seeing double digit increases in its growth rate largely because of the growing number of deeply indebted consumers who were seeking relief by going under debt review.