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Tax increases and interest rate hikes to put South Africans on the path of hardship

Tue, 23/02/2016 - 10:59

​With the announcement of the national budget on Wednesday, 24 February, 2016, Finance minister Pravin Gordhan is expected to announce severe austerity measures with the aim of avoiding a credit rating downgrade to junk status (lower than investment grade).

Rating agency Standard & Poor’s may downgrade South Africa to sub-investment grade, should government not indicate it is taking steps to boost economic growth, says Professor Jannie Rossouw, Head of Wits’ School for Economic and Business Science.

“This year’s budget will go down in history as South Africa’s austerity budget with the main aim of avoiding a credit risk rating downgrade to junk status (lower than investment grade). As the economy will experience no or at best very low growth this year, it will be necessary to (i) contain expenditure on any luxuries and unnecessary expenditure; (ii) contain the deficit before borrowing (difference between income and expenditure); and (iii) increase taxes.” 

With this in mind, the government will have to raise taxes, while it is also likely that interest rates would be raised.

“An increased tax burden plus increased interest rates, owing to expected higher inflation, will place consumers under pressure. It is therefore not a good time for consumers to take on additional debt and commitments at this point in time; they should rather make sure that they can afford what they have already committed to with lower disposable income (after-tax income).”

Rossouw, in association with the Professional Provident Society (PPS), have recently completed their sixth comprehensive South African inflation survey among PPS members. 

Respondents were asked to respond to two questions:

1. Whether they believe that historic inflation reflected accurately the price increases in South Africa and; 

2. To state their expectations of future inflation.

Eighty-three per cent of respondents indicated that they perceived actual price increases to be higher than the official rate of inflation. This is substantially higher than the finding of the fifth survey conducted in the fourth quarter of 2015, when 72 per cent of respondents reported a perception of price increases above the rate of inflation (Figure 1).​​


In response to the second question, respondents had to state their expectations of future inflation. As is shown below, 90 per cent of respondents expect higher inflation in future, while 80 per cent had such an expectation in the fourth quarter of 2015 (Figure 2).​


“The research data shows an expectation among consumers that South African inflation will accelerate in coming months,” says Rossouw. “As South Africa follows an inflation targeting policy framework, accelerating inflation is followed by interest rate increases”.

The research also shows a clear link between inflation perceptions and inflation expectations. The only way to contain inflation expectations is to convince consumers that historic inflation figures reflect accurately historic price increases. 

 “PPS includes the survey questions in its quarterly survey among South African professionals and will continue to do so in future,” says Gerhard Joubert of PPS. “PPS is excited about this opportunity to continue its collaboration with the SEBS at Wits.”

The quarterly survey is distributed electronically among PPS members and forms part of a broader survey on perceptions and impressions undertaken by PPS. The survey is completed electronically by PPS members and is therefore free from any enumerator bias of influence. 

The latest survey questions were distributed on 2 February 2​016 an​d received 3 996 responses

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