Our original article described a methodology by which to formulate a scientifically derived salary increase for 2019 and recommended a 6.5% salary increase. Our subsequent January 2019 update revised this forecast down to 6.0%. This update examines the validity of this forecast given incoming economic factors.
The recent declines in inflation appear to have abated and inflation in February 2019 was recorded at 4.1%, slightly higher than January’s 4.0%. Our model is indicating that January 2019 represented the low point of the recent trend and that inflation will rise during the rest of 2019 and average 5.0%. This is slightly higher than the 4.8% average used by the Monetary Policy Committee (“MPC”) to determine official interest rates.
We remain wary of upside risks to inflation and especially rand depreciation because of a possible ratings downgrade, higher international oil prices and the spectre of significantly higher administered prices.
However, there are other factors to also consider when determining the salary increases of employees this year. Inherent in our recommendation is a real increase of 1.0% i.e. a 1.0% increase over and above the forecast inflation rate. Various factors announced during Finance Minister Mboweni’s recent budget, imply that even if you grant employee’s a 1.0% real increase, a significant portion of this increase will be “gobbled up” by the following factors:
This year’s Budget did not increase the income tax brackets in line with inflation. This is the first time since the 1990’s that the brackets have not been adjusted and this policy action is expected to raise an additional R 12,8 billion for the government. The implications for employees are significant and because the tax brackets have not been adjusted for inflation, employees will pay more tax – R12,8 billion more. Assume one earns R20,000 per month and receives a 6.0% salary increase. The actual increase in net pay, after tax, will only amount to 5.2%.
Other costs are increasing. Medical aid costs are increasing in excess of inflation and have been for some time. For example, Discovery recently announced that they would increase medical aid contributions by 9.0%; compared to our forecast inflation rate of 5.0% for 2019. A further erosion to an employee’s disposable income is the fact that the government did not increase the medical aid tax credit during the Budget. This remained at R310 for the first two members and R209 for each additional person thereafter.
The Minister of Finance did not increase the business travel deduction to take account of inflation.
The take-away from the above is that if you, as the employer, grant employees a 6.0% salary increase, and our inflation forecast of 5.0% is correct, they will not receive a real increase of 1.0%. Instead they will probably only be receiving an inflationary adjustment. Is this equitable? Given the low growth, the difficulty which businesses are experiencing in passing on higher inputs costs to customers and general business affordability considerations, we are of the opinion that a 6.0% salary increase for 2019 remains equitable to all stakeholders.
We will however continue to revise our projections over the coming months to take account of incoming economic data. If you would like to receive these regular updates, please email us at Brett@axiomatic.co.za so we can include you on our mailing list.