National Treasury will have to increase taxes even more significantly this year than in previous years, as a ratings downgrade looms, the rand falls and inflation climbs. Unfortunately, consumers stand to bear the brunt of this.
According to Johann Els, senior economist at Old Mutual Investment Group, in order to prevent a downgrade to SA's debt, the government needs to make some difficult decisions to reduce the budget deficit. And most of this will come from tax hikes, he said.
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Consumer tax increases would be the easiest place to start, specifically targeting high-income earners. Raising the effective rate for capital gains tax could be another, as could a fuel levy increase. Other tax options include an increase in property tax and inheritance tax, as well as a wealth tax. And while a VAT hike also do wonders, Els believes this is unlikely as we are in an election cycle.
Els was quoted in the media as saying:
"A VAT hike would almost certainly stabilise the rand and satisfy the ratings agencies enough to avoid the looming threat of a downgrade of SA to junk status - at least in the short term."
While unpleasant for consumers, extensive tax hikes or tighter fiscal policy will certainly take some of the pressure off the Reserve Bank increasing interest rates further, Els believes, adding that he does not feel the country is facing a deep consumer spending recession.
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