CONSUMERS are in for a tough time. They face the combined impact of a VAT increase, income tax bracket creep, and the absence of a strong, growth-stimulating fiscal spend in the recent Budget Speech. Some argue, however, that these pressures could have been eased by a reduction in the interest rate — a move that might also have helped revive the sluggish property market.

It is getting harder, say the experts, for the average South African to keep up with costs.

In fact, says Tanya Tosen, a tax and remuneration specialist at Tax Consulting South Africa, employees actually need a salary increase of at least 5% just to maintain their current spending power.

She said this is because Finance Minister Enoch Godongwana has not adjusted personal income tax brackets for inflation in the 2025/26 tax year.

“That means many people will be pushed into higher tax brackets without realising it, leading to more tax deductions and less money in their pockets,” Tosen said.

Looking closer at the numbers during a recent webinar hosted by CPD Consortium, Tosen broke down what this means for different salary brackets.

She said that for high earners, where someone earning R2 million receives a 5.5% increase, they could end up with nearly R7,000 less in their take-home pay because of the higher tax bracket. They would actually need a 6.13% increase just to break even.

For middle earners, a person earning R30,000 per month, would see their marginal tax rate jump from 26% to 31% if they received a 4.3% salary increase. Tosen said that without tax bracket adjustments, their PAYE (Pay As You Earn) tax would increase by nearly R4,200 per year, leaving them with less disposable income.

Interest rates

Making things worse is the Monetary Policy Committee's decision last week not to reduce the repo rate, leaving it at 7.5%, while the prime lending rate stays at 11.0%.

Reacting to the South African Reserve Bank's decision, Douw Boshoff, a professor of Real Estate at the University of Pretoria (UP) said this decision is particularly disappointing because the underlying domestic metrics are reported to be well contained, CPI is below expectations, and economic growth is lower than anticipated and its forecast for future performance being reduced would have benefitted from a stimulating reduction in interest rates.

He said a reduction would have provided good support for the property market, which is very capital intensive, and a reduction in the interest rate would directly impact the market in a positive way, and also indirectly through affordability stimulus and demand for other goods and services traded from property.

“It was also pointed out that the CPI measurement going forward is based on an adjusted basket weighting, whereby the basket has an increased weight from 3.50% to 4.37% for rental housing and a reduction from 12.99% to 11.16% in owner equivalent rent.

"It is therefore clear that households are giving up owned housing for rented housing, losing out on the long-term wealth benefits associated with home ownership.

"These weights do not appear to be massive when considered as a proportion of the whole basket, but if one considers the 25% increase in rental weight against a 14% reduction in owner equivalent rent weighting, the context becomes clearer, and is alarming.

"Given the recent budget speech, the situation is expected to worsen further. It is furthermore clear that people are spending less on housing overall, as measured by the combination of these weights, indicating that there is a lower demand for housing, typically associated with lower affordability (or higher cost).

Property

"So although it appears as if property will just not have the positive benefits of an interest rate reduction, the fact is that the unaffordability causes less spend on property, thus lower demand and ultimately a negative impact on values. Obviously this in turn, further reduces the wealth benefits of home ownership,” Boshoff said in response to an Independent Media Property enquiry.

Boshoff said as an explanation for the refusal to cut the interest rate, amidst the underlying metrics appearing to warrant at least a modest reduction of 0.25%, or even a larger 0.5% reduction, it is said that the uncertainty of the international market is to blame.

He said indications are that short-term containment of inflation does not eliminate the longer-term risk, with potential increases in electricity cost, and reliance on diesel for electricity generation used as an example, whereby the current lower fuel price could turn the situation for the worse if the fuel price would increase, which is expected.

“The reliance on the international market has been alluded to as a very important aspect of the decision, and even though the domestic performance is very important in the consideration, the uncertainty in the international market is expected to influence the domestic market in the medium to longer term.

"It has been said previously that the MPC does not take a decision based on interest rate decisions by the international market, and specifically the USA, but given the fact that the USA kept their interest rate the same yesterday, it is still wondered if there isn’t some influence, especially the strong remarks this time round about the uncertain international market.

"It is so that given the USA’s decision, if the SARB MPC had announced an interest rate cut, it would have had a direct negative impact on the currency, causing the ZAR to depreciate against major international currencies.

"Although this would be beneficial for exports, it would be negative for imports and also international investments, which is a large portion of property investment capital, and might cause investors to choose other markets for investment.”

Political uncertainty

The real estate professor said although South Africa is a net export economy, with a positive trade balance, the margin is thinning over the last number of years. He said the recent political uncertainty with markets like the USA is threatening this situation, which could negatively impact exports, further supporting a more cautious approach on exchange rate stability.

“Large volume imported goods like fuel and oil, would be directly impacted, increasing inflation due to transportation cost of all goods, as well as electricity generation costs as alluded to earlier. It will also increase the cost of producing major export goods like agricultural products and mineral products, causing a loss of competitive advantage, further damaging the trade balance. So although the MPC reports that they do not follow the USA FED’s decision, the suspicion remains that they put a large weight on it for local impact.”

He said although the lack of an interest rate cut is very disappointing for the property market especially, there are longer-term impacts which must be considered, and the explanations for the decision is probably warranted. “I have a lot of confidence in the SARB MPC, and to keep a balancing act is not easy, so I’d rest assured that it is for the better to ensure a resilient economy going forward, and that it would not help to have long-term adverse impacts just for a short-term benefit,” Boshoff said.

Cutting cycle

Koketso Mano, FNB senior economist said a continued cutting cycle would further increase disposable income for lower-income groups, creating more room for spending on durable goods. “This, along with the liquidity injection from the two-pot retirement withdrawals which has allowed some households to improve their balance sheets, should be encouraging for consumer participation in the property market.

"That said, higher-income households and corporates are more sensitive to sentiment around policy and the macroeconomic outlook in their investment decisions. Unfortunately, prevailing global volatility and concerns about the stability of the Government of National Unity (GNU) may undermine the confidence of these economic agents, causing some to adopt a cautious wait-and-see approach.

"Ultimately, monetary policy aims to anchor inflation over the medium term, especially given the global policy uncertainty. Their success in this is key to policy credibility, containing the risk associated with SA assets, as well as insulating the macroeconomic outlook and the value of the rand. This is important for the performance of all sectors and agents in the economy,” Mano said.

- INDEPENDENT MEDIA PROPERTY

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Employees need at least 5% salary increase just to maintain spending power - tax expert