Big threat to South African households

By not adjusting South Africa’s personal income tax brackets for inflation, the government is effectively reducing consumers’ spending power, as they are taxed more in real terms.

Investec chief economist Annabel Bishop recently explained that household consumption expenditure growth – one of the biggest economic growth drivers in South Africa – is expected to expand less this year than previously forecast.

This is due to the dulling impact of the government’s value-added tax (VAT) hike and other tax impacts, such as hikes on excise duties and no bracket creep relief.

In the 2025 Budget, which Finance Minister Enoch Godongwana presented earlier in March, the National Treasury proposed several measures to raise additional government revenue.

One of these measures was a VAT hike. The tax is set to rise by half a percentage point in 2025/26 and another half a percentage point in 2026/27, bringing the VAT rate to 16%.

Another additional revenue measure was no inflationary adjustments to personal income tax brackets, rebates and medical tax credits.

Godongwana said these two measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27.

While the VAT hike has been front and centre in analyses and commentary on the 2025 Budget, the second measure has largely flown under the radar.

By not adjusting the tax brackets for inflation, the National Treasury is giving rise to “bracket creep”.

Bracket creep, in effect, makes taxpayers pay more without raising the tax rate, resulting in greater revenue without hiking rates.

OUTA recently pointed out that, since 2012, there have been only three years where the PAYE tax brackets were adjusted higher than inflation.

Bishop explained that adjusting tax brackets for inflation is key to protecting South Africans’ spending power.

“Relief for bracket creep on incomes is key as consumers lose out on spending power when they are taxed more in real terms, i.e. they are not compensated for the rise in inflation and enter a higher tax bracket when getting CPI-linked salary increases,” she explained.

“Failure to adjust for bracket creep means households have a lower disposable income, losing out on their inflation-adjusted salary increases, which tend to be the norm.”

Big economic threat

Bishop pointed out that bracket creep is not harmful to consumers but can also be counterproductive for government revenue and economic growth.

She explained that failure to compensate for bracket increases and higher taxes adds to wage negotiations for public servants.

Therefore, the average salary and wage increases in South Africa are skewed to the upside due to higher-than-inflation compensation increases for public servants.

This, in turn, places pressure on state expenditure and results in pressure on revenue collection. 

March’s Budget noted that, for the 2025 public-service wage agreement, remuneration of government employees will rise by 5.5% in 2025/26.

It said this agreement will cost the fiscus an additional R7.3 billion in 2025/26, R7.8 billion in 2026/27 and R8.2 billion in 2027/28. 

The agreement exceeds the 2024 Budget and Medium-Term Budget Policy Statement projections.

“Compensation increases are then skewed towards the public sector employees, while the burden on taxpayers generally increases,” Bishop explained.

She added that higher taxes quell growth, particularly over the past decade, and this practice is seemingly continuing this decade.

In addition, consumers’ reduced spending power means the outlook for household consumption expenditure (HCE) is bleak.

As HCE is one of the most significant drivers of GDP in South Africa, this spells bad news for economic growth as well.

“The collapse in consumer confidence and deterioration in the outlook for household consumption expenditure should set alarm bells ringing in terms of South Africa’s economic prospects,” FirstRand recently told Bloomberg.

“The combination of rising inflation, tight monetary policy and higher real taxes will erode households’ ability to spend while plunging consumer confidence levels signal a dramatic decline in consumer’s willingness to spend.”

However, there are some positive signs, with Bishop pointing out that withdrawals from pension savings under the new two-pot system will aid HCE growth to some degree.

Interest rate cuts and lower inflation compared to a year ago will also provide some relief for South African households.