Point of view: Finance minister announced a nuanced approach regarding tax

This tactic, known as “bracket creep” or “fiscal drag”, essentially results in an indirect tax increase. Picture: Ayanda Ndamane Independent Newspapers

This tactic, known as “bracket creep” or “fiscal drag”, essentially results in an indirect tax increase. Picture: Ayanda Ndamane Independent Newspapers

Published Feb 24, 2024


Finance Minister Enoch Godongwana has confirmed that tax revenue for 2023/24 is R56.1 billion lower than estimated in the 2023 budget, according to Yolandi Esterhuizen, director of Global Compliance: Product Management, Sage, and registered tax practitioner.

Godongwana tabled his Budget speech this week. Esterhuizen said the higher budget deficit means that debt-service costs in 2023/24 have been revised higher, by R15.7bn to R356bn. These shortfalls could lead to South Africans facing tax increases and reduced government spending in the coming years.

“However, rather than directly increasing VAT or personal taxes, the minister announced a more nuanced approach in his Budget speech. The government has opted not to adjust tax brackets, rebates, and medical tax credits for inflation.

“This tactic, known as ‘bracket creep’ or ‘fiscal drag’, essentially results in an indirect tax increase. As salaries rise with inflation, individuals may find themselves pushed into higher tax brackets, leading to a larger portion of their income being taxed at higher rates. In addition to this, consumers will face increased costs due to above-inflation hikes in excise duties on alcohol and tobacco products," Esterhuizen said.

According to Esterhuizen, these measures are part of the government’s strategy to raise an additional R15bn in revenue for the 2024/25 fiscal year, aimed at alleviating immediate fiscal pressure and supporting faster debt stabilisation.

“The result of these changes? Whilst VAT and personal income tax has not been increased, South Africans must still tighten their belts as the effects of higher prices for certain goods could lead to reduced disposable income and decreased consumer spending.

“In turn, this could trigger economic ripple effects such as job losses, slowed growth, and potentially even inflationary increases, resulting in price hikes and lowered purchasing power,” Esterhuizen said.

According to Esterhuizen, while personal tax increases are seen as necessary from the government’s perspective to fund public services such as health care, education, and infrastructure, it’s crucial to consider the potential negative impacts on consumers.

“The government’s strategy to balance the need for additional revenue against these possible adverse effects remains to be seen. Overall, the Budget speech highlights the need for careful management of South Africa’s finances while maintaining fiscal sustainability,” Esterhuizen said.

Meanwhile, Jacobus Brink, chief investment officer at Schmidt Family Office (SFO), said the minister was very good at concealing the tax increases and making a point of allocating funds to health, welfare, and law enforcement, all of which are crucial concerns for average South Africans, especially when it is proposed in an election year.

“This budget did, however, not allocate much to resolve the economy’s two greatest obstacles: inadequate power and logistics. Overall, the Budget does not give much relief to taxpayers, and with high debt to GDP and structurally low growth rates, the overall picture remains bleak. But not necessarily more so than in previous years.

“The only way out of this predicament is the private sector and as the government opens up more sectors to private investment, there is hope that corporates will be able to provide the impetus to bolster the country to such an extent that a turnaround from the current state can be achieved,” said Brink.

Chris Blair, CEO of 21st Century, said delving deeper into the individual impacts, the decision to maintain the current VAT rate alongside unchanged wealth tax and levies directly influences the cost of goods and services, thereby stabilising consumer expenses.

“However, the absence of adjustments in personal income tax tables to counter inflationary pressures ominously looms as a potential detriment to disposable incomes, heralding the phenomenon of ‘bracket creep’ and the consequent erosion of real disposable income,” said Blair.

* Maleke is the content editor of Personal Finance