Knock-on effects of tax hike

MORE PRESSURE: INFLATION LIKELY TO INCREASE AND CURB REPO RATE CUTS - ECONOMISTS

- Ina Opperman

The decision to increase value-added tax (VAT) by 2% in the undelivered budget 2025 will increase inflation, which will give the Reserve Bank reason to pause cutting the repo rate.

Maarten Ackerman, chief economist at Citadel Investment Services, said a further 2% increase in the VAT rate would put significant strain on consumers who are already under pressure.

"Given the cost-of-living crisis, our interest rates are still fairly high and we are sitting with high unemployment. Therefore, any additional tax will be quite negative for the consumer base."

The impact of a 2% increase in VAT was also inflationary.

"The last time VAT increased, from 14% to 15% in 2018, it added around about 0.5% to inflation.

That implies that the South African Reserve Bank (Sarb) would probably be more cautious in terms of cutting rates because that will add to inflation pressure in the economy.

The Sarb will then probably keep rates unchanged for the rest of 2025, which is another impact for consumers."

Sanisha Packirisamy, economist at Momentum Investments, said: "Our view is that the Sarb possibly has room to cut the repo rate once more in the cycle, based on the outlook for inflation and risks to the inflation outlook.