Consumers may have won a headline victory with the reversal of the proposed VAT hike but Wednesday’s national budget reveals a quieter assault on their wallets.
Political pressure and the courts forced the Treasury to back-pedal on raising VAT — a move that was widely welcomed.
Yet, the relief is likely to be short-lived. Economists and industry bodies warn that inflation-linked fuel levies and unadjusted tax brackets will stealthily increase the financial burden on households — driving up the cost of living through the back door.
Fuel, which has remained unchanged since 2022 and was expected to save consumers R4bn in the March budget will now increase in line with inflation.
“There’s a 16c increase in petrol and 15c increase in diesel. So there is an increase in the fuel levy and consumers will feel it,” Treasury’s acting deputy director-general: tax and financial sector policy Chris Axelson told journalists during a budget Q&A session.
According to Gavin Kelly, CEO of the Road Freight Association, “transporters cannot absorb increases without detrimental effects on their bottom-line (business sustainability)”.
Independent economist Elize Kruger said the effect might be muted as fuel prices were expected to decline in June. That, she noted, would be likely to result in “a smaller cut in prices, rather than an outright increase for the month”.
Before finance minister Enoch Godongwana’s announcement, the latest data from the Central Energy Fund (CEF) indicated that wholesale diesel prices could drop by as much as 50c/l, while petrol could decline by up to 23c/l.
This was attributed to a stronger rand against the dollar — making fuel imports cheaper — as well as a decline in international oil prices.
Tax is another front where consumers are quietly losing.
According to Casey Sprake, Anchor Capital economist, the Treasury has leant heavily on fiscal drag by opting not to adjust personal income tax (PIT) brackets for inflation.
“This measure alone is expected to generate R49.4 bn over the three-year period,” Sprake said.
Kruger explained an unchanged bracket creep means salary earners’ annual increase in earnings could be eroded by having to pay a higher tax rate, if an inflation-related salary increase pushes the earner into a higher tax bracket.
“A salary earner with an annual salary of R370,500 would have paid tax of R77,362 in the previous financial year (based on a 26% rate), which is a net salary of R24,428 per month. With an average salary increase of 5.5%, the earnings will rise to R390,878, which pushes the person into a higher tax bracket,” she explained.
“Taxes of R83,679 will have to be paid, based on a rate of 31%, with a resultant net salary of R25,600 per month. The effective net increase for the salary earner will now only be 4.8% versus the actual gross increase of 5.5%.”
Stated otherwise, this also means the annual taxes paid by the particular salary earner increased by 8.2% versus the nominal salary increase of 5.5%, Kruger said.
“It can almost be seen as an invisible personal income tax on salary earners. Tax rates remain unchanged, and the bracket parameters also remain unchanged. The salary earner still earns more, on a net basis, but forfeits more as well.”
Revenue will also be drawn from sin tax — “higher excise duties on alcohol and tobacco and a freeze on inflation adjustments to medical tax credits, collectively adding R5.8bn”, Sprake said.
According to Stanlib chief economist Kevin Lings, the decision not to expand the list of zero-rated VAT items effectively saves the Treasury R6.4bn in tax revenue over the medium term.
However, because the change was never implemented, “it will not detract from poor people per se,” Kruger noted, adding that they would continue paying VAT on those items as they always had.
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