The 32,6% year-on-year (y/y) rise in value-added tax (VAT) collections to R7,528-billion in October points to a buoyant South African economy, as VAT is a very good indicator of general economic activity.
This is because VAT is levied throughout the production and distribution chain, and also reports what Statistics South Africa measures for gross domestic product (GDP), namely value added.
There has historically been a high correlation between nominal VAT collection growth and nominal GDP growth. In fiscal year 1996/7, VAT rose by 9,6% y/y and nominal GDP by 12,6% y/y. In fiscal year 1997/8, VAT grew by 11,7% y/y and nominal GDP by 10,1% y/y. Then in 1998/9, VAT increased by 8,9% y/y and nominal GDP by 7,7%. In fiscal year 1999/2000, VAT rose by 10,7% y/y and nominal GDP by 8,9% y/y.
VAT collections are volatile on a monthly y/y basis, so it is best to add several months together. The cumulative increase for the first seven months of the fiscal year is 11,4% y/y compared with a budgeted 14% for the full fiscal year. This compares with only a 7,6% y/y increase in nominal GDP for the second and third quarters combined.
Economists expect the demand side of GDP to be stronger than the production side. The South African Reserve Bank (SARB) will report these figures on December 4.
In June 2003, the SARB cut interest rates by 150 basis points. This was the first rate cut since September 2001 after the SARB raised interest rates by 400 basis points in 2002 over nine months.
The June rate cut was followed up by a further 100 basis points cut in August, another 100 basis points cut in September and a 150 basis points cut in October.
Already in the second quarter of 2003, aggregate real gross domestic expenditure (GDE) in South Africa had the highest y/y growth at 5,45% y/y since the first quarter 1995, when it was 6,82% y/y.
The highest y/y increase in GDE before that was in the first quarter 1988, when it reached 9,59%.
The October VAT data shows that the second quarter and third quarter y/y GDP growth are likely to be revised higher next year.
Last week, Statistics South Africa revised the 2002 growth rate to 3,6% from an initial estimate of 3,0%. — I-Net Bridge