The price of eating

2014-07-28 08:00

The Treasury has decided to amend tax rules that apply to farmers, who may not be able to bear the extra cost

Consumers are paying more for an ever-shrinking basket of groceries, and the SA Reserve Bank (SARB) is battling to keep inflation in check.

Late last week, National Treasury unveiled tax amendments that a farmers’ industry group expects will hit its constituents hard.

Inflation statistics released on Wednesday showed that,

in May and June, consumer price inflation for food and non-alcoholic beverages was 8.8% year on year, compared with 6.8% last year.

In last week’s monetary policy committee (MPC) statement, SARB Governor Gill Marcus said inflation exceeded the upper end of the target range, mainly because of the exchange rate and rising food prices. Food prices were a continuous theme throughout Marcus’ statement, along with wage demands, which some experts have argued were driven by rising food prices.

On the day of the MPC statement, the Treasury released proposed amendments to the taxation laws, including the scrapping of zero-rating of goods for agricultural, pastoral or other farming purposes.

Currently, farmers with a notice of registration from the SA Revenue Service (Sars) are able to buy items such as fodder, pesticide, plants, seeds and fertiliser without having to pay VAT. Should the proposal go through, they will have to pay the VAT and claim it back when they file their tax returns.

The proposed amendment will come into effect next April.

“The zero-rating of agricultural inputs will definitely lead to some increase in prices of agricultural goods,” said Nedbank’s Isaac Matshego. “Even though farmers can apply for VAT refunds, it is not inconceivable that some of them will take advantage and pass some of the cost of the VAT to consumers. However, I am confident that the Treasury would have considered such a scenario, and measures to minimise the occurrence of such will be adopted.”

Industrial association AgriSA – which told financial daily Business Day the sector spends R100?billion on zero-rated goods a year – is concerned farmers will not be able to bear the extra cost until they can apply for refunds during tax season.

“Farmers are already struggling to seek finance, which in any case is expensive, so this will just add to that burden,” said Dawie Maree, AgriSA’s senior economist.

He said the proposal would have a direct impact on food prices because farmers would have to bear the brunt as “price takers”.

“In the long run, it might have an impact on production trends, which may have consequences. If anything will be affected it will be mainly maize meal and milk, but it is highly unlikely.”

Maree said it was more likely that farmers would be forced to make production decisions in terms of costs, which might lead to a decision to produce less because of financial constraints.

“This, in the long run, will then affect the availability of some products and, linked to that, the prices of these products.”

National Treasury spokesperson Phumza Macanda said the concession provides farmers with short-term cash flow relief, and farmers would be able to claim back the VAT paid with a maximum delay of two months if the zero-rating is abolished.

“The inflationary impact will be minimal – only with respect to the additional financing charges for such inputs for about two months.”

But the inflationary outlook – at least for consumers – for the next few months is not good, according to economists.

“While food inflation is expected to ease in [the third quarter] and moderate in [the fourth quarter], we are likely to see an uptick in price pass through from retailers to consumers,” said RMB’s Mamello Matikinca, referring to retailers’ gradual increases in prices, which RMB did not have projections for.

But she said food inflation could peak at about 9% in the third quarter, with gradual decreases throughout the rest of the year.

FNB’s Alex Smith indicated that consumers might not need to panic about the tax proposal.

“The Treasury’s proposal may place some upward pressure on food inflation if it comes to pass,” he said. “Bear in mind that with most tax changes, only part of the increase is passed on to consumers and this portion tends to be smaller when consumer demand is weak – as it is now.

“Nevertheless, the overriding trend in food prices at this stage is the recent sharp decline in grains prices both locally and globally, as well as the stabilisation in the exchange rate following a period of weakness.”

Local maize futures prices are currently more than 55% below their recent peak in March this year, according to Smith. Wheat prices had also come down more than 10% from recent highs.

Smith said these lower grain prices will push down the price of bread and cereal, while keeping meat prices from rising rapidly, as these are used in cattle and chicken feed.

“Therefore, even if we take the proposed amendment into account, food price inflation is likely to be lower next year than this year,” he said.

Banks respond to repo rate hike

Last week, the SA Reserve Bank raised rates by 25 basis points in an attempt to find a balance between rising inflation and a weakening economy. The move by Treasury has raised questions about whether there is a disconnect between monetary policy – which the central bank is the custodian of – and fiscal policy under the stewardship of the Treasury. The reserve bank’s Candice Jeffreys referred questions to the Treasury

Phumza Macanda, National Treasury:

Fiscal and monetary policy complement each other. A sustainable macroeconomic policy environment requires that inflation is kept within reasonable limits.

But this does not imply the fiscus should be constrained in raising tax revenue and limiting tax avoidance. The proposal is due to the fact that Sars detected abuse.

There were a significant number of VAT- registered vendors in the agricultural industry who supply goods to this industry who had been abusing the authorisation granted to acquire certain goods at the zero rate of VAT.

Alex Smith, FNB:

In South Africa, monetary and fiscal policy have been working together for some time. Leading out of the 2008/09 recession, interest rates were cut aggressively, while the Treasury increased the budget deficit, keeping spending growth high even as revenue disappointed. Therefore, both monetary and fiscal policy makers were supporting the economy.

More recently, rates have been hiked and the Treasury has set tight spending limits. While rates are still low and government is still growing spending above inflation, both monetary and fiscal policy have become tighter. The recent moves by both the Treasury and the [reserve bank] should in time result in higher levels of savings and a better balance between production and consumption in the economy.

Isaac Matshego, Nedbank:

Macroeconomic policy coordination is crucial for overall stability. The MPC is tightening policy in a bid to rein in inflation and keep inflation expectations well anchored, so this requires government to ensure it limits growth in public expenditure to a level that will not stoke inflationary pressures. Demand pressure is muted at the moment, but a significant increase in state expenditure could be inflationary.

Encouragingly, Finance Minister Nhlanhla Nene has indicated government is committed to ensuring expenditure growth is kept under control.

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