Home Opinion and Features Brace for higher cost of living, PwC warns SA consumers

Brace for higher cost of living, PwC warns SA consumers

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PwC has warned that financially-constrained consumers should brace for an even higher cost of living as the finance minister looks likely to opt to hike value-added tax (VAT) slightly instead of other taxes in a bid to raise R15 billion required to stabilise public finances.

An employee restocks shelves with food products. File picture

PwC HAS warned that financially-constrained consumers have to brace for even higher cost of living as Finance Minister Enoch Godongwana looks likely to opt to hike alue-added tax (VAT) slightly instead of other taxes in a bid to raise R15 billion required to stabilise public finances.

Next week Godongwana will table his Budget Speech in Parliament amid seriously deteriorating public finances on the back of a R57bn tax revenue shortfall as tax collection for the 2023/24 fiscal year has underperformed the original budget estimate in the February Budget 2023.

Treasury significantly revised downwards by R56bn its forecast for total tax revenues in November, from R1.787bn to R1.731bn, mainly led by substantial decreases in the expected corporate tax collections of R36bn and VAT of R26bn due to higher refunds.

In his Medium-Term Budget Policy Statement in November, Godongwana announced that the National Treasury would propose tax measures to raise R15bn additional revenue in the 2024 Budget, though he acknowledged that increasing taxes in the current economic environment would be difficult for everyone.

PwC South Africa tax policy leader Kyle Mandy said on Tuesday that to raise an additional R15bn in tax revenues would require either increasing the corporate income tax (CIT) rate by 1.4% to 28.4%, increasing personal income tax (PIT) rates by 0.5% across all tax bands, or increasing the VAT rate by 0.5% to 15.5%.

Mandy said that though Godongwana had not given the details of where the R15bn additional tax revenue would be spent, it was likely to accommodate the extension of the R350 Social Relief of Distress (SRD) grant just as the government had increased VAT by 1% to 15% to accommodate the commitment to free higher education.

However, he said increasing taxes would be a last resort, with Treasury hoping that revenue collections for the current fiscal year exceed the November 2023 forecast, and that the revenue outlook for the medium term improves as a result.

“The most economically efficient and least harmful way to raise the additional tax revenues of R15bn that National Treasury indicated would be introduced in Budget 2024, would be by way of a 0.5% increase in the VAT rate to 15.5%,” Mandy said.

“We believe that a VAT increase rather than a personal income tax increase can be justified by the extension of the SRD grant and the need to fund this, including the likelihood that the grant will be made permanent in some form.”

Mandy said even relatively small tax increases such as those proposed would have a dampening effect on the economy in a low-growth, high inflation and high interest rate environment.

However, he said that when viewed together, an increase in VAT in order to fund social spending, particularly in the form of a means tested grant, was “highly progressive” in aggregate.

“These considerations must be weighed against the risks and uncertainties of raising additional tax revenues from PIT or CIT,” he said.

“However, Treasury will face considerable pushback to any proposed increase in the VAT rate and it is uncertain which way they will go.”

Mandy said other taxes such as the fuel levies, sugar tax, excise duties, transfer duties and carbon tax would probably be increased in line with inflation.

However, it is expected that incentives for the production of electric vehicles in South Africa will be announced in the Budget but no incentives to support local demand for electric vehicles at this stage.

Meanwhile, PwC South Africa chief economist Lullu Krugel said the national debt burden of more than R5 trillion was at risk of increasing further due to possible transfers of State-owned enterprises (SOEs) debt to the sovereign balance sheet and the further guaranteeing of SOE debt.

Krugel said the government needed to look at managing its costs and expenditure while also growing its tax revenue pot as some SOEs were a drag on the fiscus and could be partially given to the private sector to run at a profit.

“We need an understanding where we can take expenditure away from the government and give it to the private sector to run profitably, especially on the infrastructure side, and where we need a combination of private and public sector funding,” Krugel said.

“For example, if you look at energy, what can the government do without it actually costing them money and saying to the private sector, we’ll make it worthwhile for you, from a risk perspective, to invest in these kinds of items?”

– BUSINESS REPORT

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