Financial services company Citibank South Africa economist Gina Schoeman says the National Treasury is unlikely to increase the value added tax (VAT) rate again this year and that government is unlikely to reopen wage negotiations with government employees before 2021, despite the high government wage bill.
Speaking ahead of the National Budget speech, which will be delivered by Finance Minister Tito Mboweni in Parliament on February 26, she told the media during a briefing on Tuesday that South Africa's gross domestic product is forecast to grow by only about 0.6% this year.
While growth remains low, commodity price increases, like those of platinum and palladium, are likely to “give [the country] a bit of bump up” on export deflations and should be considered “a lucky windfall”.
Economic growth is, however, not expected to increase rapidly and the National Treasury faces a difficult task in finding the necessary revenues.
Although some commentators have suggested the Treasury may again increase the VAT rate by between 0.5 of a percentage point and one percentage point, to 16%, Schoeman believes this is unlikely to happen.
“If you look at South Africa’s household debt compared to disposable income, it takes about 74% of a calendar year’s worth of disposable income to pay off debt,” she explains, reiterating sentiments that South Africa has one of the biggest income inequalities in the world.
This household debt to disposable income ratio is applicable to about two-thirds of South Africa’s consumers, highlighting the fact that “there is massive vulnerability in this portion of South Africa”.
“In my view, a VAT increase for South Africa would be politically and socially inappropriate and it’s also not realistic from a political perspective,” she states, adding that a VAT increase is “not a sustainable solution, and since it’s considered to be a one-off solution, and South Africa is tired of band aids that aren’t getting the [required] results”.
To put it into perspective, Schoeman says the 2018 VAT hike to 15% only resulted in additional revenue of about R17-billion, when the government had been anticipating additional revenue of about R23-billion.
On the government expenditure side, there have been widespread calls for government to rein in spending, particularly on government employee salaries, which make up more than a third of government expenditure.
Schoeman said the National Treasury was likely to “toe the line” until 2021, and only then make a firm commitment to negotiate a new three-year wage deal with government employees.
However, she states that, with the upcoming Budget speech, “it’s safe to consider that government may have found a way to open the three-year wage agreement for negotiations, although this will only influence one year of the settlement before new negotiations take place”.
While this is a possibility, Schoeman said it was unlikely that trade unions would allow this to happen.
Next week’s Budget would, in all likelihood, only announce a firm commitment to negotiating with unions on a new wage agreement for April 2021 to April 2024.
Schoeman said government was likely to only reiterate the need for negotiations with unions during next week's Budget speech.