The poor do not live on zero-rated foods alone
No matter which way you slice it, the VAT hike and fiscal drag will depress spending and stymie economic recovery, writes Sunita Menon
The poor do not live on bread and pap alone, South African Communist Party general secretary Blade Nzimande reminds everyone.
In line with expectations from tax analysts and economists, former finance minister Malusi Gigaba announced in the budget that value-added tax (VAT) would be increased by one percentage point, from 14% to 15%, from April 1.
The hike is expected to generate R22.9bn to help finance the current consolidated deficit of 4.3% of GDP.
VAT was last adjusted in 1993 and, according to the Treasury, is lower than the global and African averages, but in recent years, trade unions have warned against a VAT increase.
Consumers are expected to be hit hard by the increase, particularly lower-and middle-income households.
An item that costs R100 will now go up to R100.88, says Old Mutual economist Johann Els. Given that real wages have not increased in line with inflation, it’s a tough pill to swallow. While there will be no adjustments to the top-four income tax brackets, there will be below-inflation adjustments of 3.1% to the bottom three brackets.
Coupled with the VAT hike, lower- and middle-income households will really have to tighten their belts.
Institute of Race Relations CEO Frans Cronje says the VAT increase and fiscal drag measures in the tax brackets will place a heavy burden on households and consumers that will depress domestic spending and undermine any attempt at economic recovery.
While brown bread and wholewheat brown bread, for example, will be zero-rated, products such as rye and low-GI bread will not be zero-rated as they are "more expensive and tend to be consumed by richer households. Even though the zero-rated items are mostly well targeted, there are a few food items, such as fruit, where higher-income households reap most of the benefits," the Budget Review notes.
There are 19 basic foodstuffs that are zero-rated to help limit the effect of rising food prices on poor households.
Among them are mealie meal, rice, brown bread, dried beans, fresh fruit and vegetables, samp, vegetable oil, eggs, milk, tinned pilchards, dried mealies, powdered milk, dairy powder blend, lentils and brown wheat meal.
However, to create a meal, households don’t just use zero-rated foods — not even lower-income households.
Pietermaritzburg Agency for Community Social Action (Pacsa) CEO Mervyn Abrahams says: "A mother does not send her child to school with a few slices of brown bread.
"She sends her child to school with a sandwich that, in addition to the brown bread, will require margarine, peanut butter, or jam, cheese, polony — these are all subject to VAT."
A chicken stew served with maize meal, for example, also requires salt, spices and chicken, none of which is zero-rated. Basic foods including zero-rated food, also require water and electricity to cook, which are subject to VAT.
Pacsa quantified the monthly cost an average working-class household would fork out for food and found that 20 out of the 38 foods were subject to VAT and 18, less than half, were zero-rated. Of the total cost of the basket at R3,129.84, a 15% VAT component was R221.59.
"Arguing that increasing the VAT rate will have no impact on working-class households because certain foods are zero-rated reveals a lack of understanding about how meals are put together," says Abrahams.
Despite the Treasury’s assurance that the wealthiest 30% of households contribute 85% of VAT revenue, the VAT increase will still fall heavily on the poor and middle class.
The zero-rated foods also do not offset the drastic increase in food prices over the past two or three years.
The high levels of food inflation were driven by a long drought and high temperatures.
Over the past three years, inflation on the Pacsa food basket increased 23.3%.
While the latest consumer price index (CPI) shows that food is becoming cheaper, it is coming off a high base.
Items in the CPI basket that became cheaper in January compared to the same month in 2017 included bread and cereals, which had a deflation of 5.1%, fruit with deflation of 3.6% and oils and fat with 3.4% deflation. Meat inflation remained high at 13.4%, bringing average food inflation to 4.6%.
However, the increase in taxes also means there could be a 0.5% rise to the inflation outlook, says Investec chief economist Annabel Bishop.
Cosatu parliamentary coordinator Matthew Parks says the only way households can escape the effect of VAT is if all foods are zero-rated.
"Just because foods are zero-rated does not mean that these foods are affordable. For example, many households no longer purchase milk because it has become unaffordable, even though it is zero-rated," he says.
He adds that the context of a weak economy means working-class households are already struggling to afford food. "An increase in VAT will make putting food on the table even more difficult."
Aside from food, there are other items that are also not exempt from tax, such as clothing and cleaning products, which means that, inevitably, everyone would be affected.
Other tax increases include a 52c-per-litre hike in the fuel levy, comprising 22c per litre for the general fuel levy and 30c per litre for the Road Accident Fund levy, and a 6%-10% increase in excise duties for both alcohol and tobacco.
"What is more‚ other indirect taxes‚ like the increase in the fuel levy‚ will further impact on the cost of living, especially for the poor‚" says Nzimande.
Last week, the Cabinet said it was considering expanding the list of zero-rated foodstuffs under VAT to mitigate the effect on the poor. Communications Minister Nomvula Mokonyane said a team of ministers led by Finance Minister Nhlanhla Nene would look into the possible expansion of the list.
Consultations would be held with civil society, although no time frame was set.
Until then, grocery bills and till slips will show how consumers are financing the government’s seemingly immovable debt.