The VAT whiplash: why SA can’t afford to ignore the real cost of policy uncertainty

When the South African Government floated the proposition of a 0.5% VAT increase earlier this year, only to cancel it at the eleventh hour, the economy may have avoided an official tax hike, but the damage had already been done. Even before the proposal could be tabled in the Budget Speech, the mere suggestion of higher VAT triggered a psychological and financial ripple effect.

Consumer sentiment shifted almost instantly, with many fearing potential retail activity dips and increased credit card usage, with many South Africans, particularly in the middle-income group, looking to tighten their belts in anticipation of rising costs that never formally materialised. 

This moment offers a sobering reflection on the state of financial resilience in the country. It wasn’t the implementation that sparked anxiety, but the uncertainty. The mere suggestion of a VAT increase was enough to trigger a reaction in households and ripple through lending institutions. This kind of market sensitivity underscores a deeper fragility: one where consumer confidence is worn thin, and policy signals - real or speculative - can tip the scale from financial coping to financial crisis.

When policy uncertainty hits home

While VAT hikes are not new in South Africa, the reaction to this latest proposal felt particularly acute. Wages have stagnated, unemployment remains high, and the cost of basic goods continues to climb. In this context, even a small increase in indirect tax feels like a direct threat.

Consumers responded accordingly. Spending signalled a slowdown across various sectors, particularly in discretionary categories. This wasn’t about affordability alone; it was largely about caution. And when spending slows but everyday costs remain, many turn to short-term solutions, namely credit.

However, for lenders, these behavioural shifts are not just theoretical; they represent a real risk, particularly when they happen suddenly and at scale. The ability to understand and track how economic announcements shape credit behaviour, whether the announcements are confirmed or not, is now business-critical.

The credit cushion is wearing thin

Recent XDS studies paint a clear picture of how South Africans are managing the squeeze. Credit card utilisation has risen steadily, not just as a function of increased spending, but as a stopgap for essential purchases such as groceries, utilities, clothing, and fuel.

Over the past five years, there has been a 13% rise in credit card utilisation, even as credit limits for new cards have dropped by 21%. This means many consumers are accessing more of their available credit, even with reduced ceilings, underscoring a growing dependence on revolving credit to cover essentials like food, fuel, and utilities. 

Notably, the average number of new credit cards issued per month has surged by 39% - a clear signal that households are turning to credit more frequently to buffer against economic uncertainty. For many middle-income households, credit is no longer a financial tool, but a survival mechanism.

This trend isn’t restricted to VAT announcements; it reflects a broader, more troubling reality: households are living closer to the financial edge, with fewer buffers in place. When a single policy proposal can stall retail spending and increase debt reliance, it becomes clear just how precarious the balance really is.

And yet, most lending frameworks still rely on backward-looking data and quarterly trends. By the time changes in consumer behaviour are reflected in reports, the impact may have already been embedded in default rates and missed payments. It’s a delayed response to a fast-moving problem.

Why real-time insight matters more than ever

Lending institutions can no longer afford to operate on stale data. In an environment, these reactive, early warning signals - based on spending behaviour, credit utilisation patterns, and even consumer sentiment - are essential for proactive decision-making. These insights help protect not just the institution but the consumer as well, enabling timely interventions before financial stress becomes financial damage.

Fortunately, the tools to respond to this volatility already exist. With the right combination of data analytics, behavioural modelling, and predictive scoring, lenders can gain early visibility into shifting consumer patterns and policy-driven financial pressure points.

A warning that shouldn’t be forgotten

While the VAT increase never happened, the response to its proposal should not be ignored. It was a litmus test, and the results are in: South African consumers are stretched thin, reactive to policy signals, and increasingly dependent on credit to make ends meet.

If financial institutions and policymakers don’t pay attention to the why behind these shifts, and equip themselves with the right tools to respond, we risk sleepwalking into a deeper crisis. The next time a policy is announced, delayed, or reversed, we may not be as lucky.

* Barkhuizen is the head of marketing at Mettus.

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