Cold front blowing in for consumers

There were 1,008 references to tax in the budget review, which made me anxious when I started looking - soon after PG started speaking on Wednesday afternoon - just what the tax hikes would be.

We knew the tax hikes were coming, but the extra R17-billion salary earners will have to pay is still going to hurt because it comes on top of forking out more for fuel, medical aid, school fees and utilities.

And it's going to be felt throughout the economy, as service providers and retailers, and the manufacturers that supply these businesses, all get a smaller slice of consumer spending.

The trade-offs consumers make anyway when deciding how to spend will become more acute.

It may be a saving grace for the economy that each person has a different definition of what is indispensable. But the tax increases will mean that what last year was considered to be an essential monthly haircut is now necessary only every two months.

A family outing may now become a quarterly treat (if at all), and maybe winter clothes that have seen more than three seasons will still do just fine.

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Increased caution will be especially necessary considering there are further tax hikes coming and also the prospect that other taxes, such as VAT, will be hiked in the years ahead.

The tax hikes are not extreme and don't represent severe hardship when you consider that those who rely on social grants have been given very modest increases. The child support grant was increased by just R20 to R380 a month.

But as consumer spending is a significant driver of economic growth, the knock-on effects could be profound. While the government said it had no option but to hike taxes to reduce the country's massive debt, it might not yield the desired results.

If economic growth stalls completely (if it hasn't already), and job losses spike, it will reduce the pool of taxpayers. Already, the tax take from salary earners has fallen short, with the Treasury saying it had been the largest tax revenue shortfall relative to budgeted estimates since 2009-10, due in part to low or no salary increases and bonuses.

But there is a limit to how far a government can go.

Sharp tax hikes in the UK backfired in the '70s, which, at 83% for top earners, far exceeded what the South African government has implemented. According to an article in The Daily Telegraph, Britain's tax regime in the '70s was one of the most punitive in the world and triggered an exodus of entrepreneurs.

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We are not anywhere near that yet, and there was some comfort in this acknowledgement in the budget review this week: "Government is acutely aware of the difficult economic conditions facing the majority of South Africans. However, deferring tax increases by accumulating more public debt would ultimately impose a greater burden on citizens."

It made me feel better that there was some sympathy, but then I remembered that some ministers continue to splash out on luxury cars - defying the government's own rules on spending limits.

The Treasury acknowledges that while paying tax is a legal obligation, the effectiveness of the tax system largely relies on the willingness of citizens to contribute, which "cannot be taken for granted given rising public concerns about corruption, wastage of public funds and inefficiencies in service delivery. A marked decline in the culture of tax morality would have negative effects on the public finances and be exceptionally hard to reverse."

Just like the government, households have a high debt burden. Unlike the government, households don't have a tax base to dip in to in order to keep up on their payments, and fatigue is starting to set in.

Enslin-Payne is deputy editor of Business Times