Nonlinear Effects of VAT on Household Consumption in South Africa: A NARDL Analysis

<ns3:p>This study empirically investigates the nonlinear effects of value added tax (VAT), interest rate, household disposable income, and economic growth on household consumption in South Africa, using annual data from 1994 to 2023 obtained from the South African Reserve Bank (SARB) and World Bank. The analysis employs a Nonlinear Autoregressive Distributed Lag (NARDL) model to capture potential asymmetric relationships between the explanatory variables and household consumption, allowing for different effects of positive and negative changes over the short and long run. The findings reveal that in the long run, positive changes in VAT significantly reduce household consumption, while negative changes lead to an increase, indicating an asymmetric and inverse relationship. Similarly, positive changes in interest rates significantly reduce household consumption, whereas negative changes lead to an increase in consumption, indicating an asymmetric relationship. Similarly, positive and negative changes in household disposable income are associated with corresponding increases and decreases in household consumption, respectively, and these relationships are statistically significant in the long run. Economic growth, despite exhibiting an asymmetric pattern, is also found to be insignificantly related to household consumption in the long term. In the short run, both positive and negative VAT and interest rate shocks result in a decline in household consumption, with the effects of positive and negative changes being statistically significant. A positive change in household disposable income causes a rise in household consumption in the short run, which is statistically significant. Additionally, a negative change in household disposable income causes a drop in household consumption in the short run. This study suggests that the South African government should exercise caution when adjusting VAT and interest rates as increases may suppress household consumption, particularly among low-to middle-income households. Additionally, efforts to enhance disposable income through targeted fiscal measures may support consumption and promote overall economic stability.</ns3:p>