On March 12, after an unprecedented postponement in February, finance minister Enoch Godongwana finally tabled the budget in parliament.
The budget painted a sobering picture of the SA economy and there is no question the situation is deeply concerning.
The economy remains stagnant, recording a mere 0.6% growth in a country confronted with significant structural challenges whose resolution depend on sustained economic growth.
SA has the lowest rate of growth among emerging markets and is one of the slowest-growing African economies.
According to the National Treasury and the World Bank Group, to address the economic challenges and achieve sustainable development, the SA economy needs to grow at a rate of 5% or higher per annum, requiring a combination of policies focused on infrastructure, investment and skills development.
But with the fiscal constraints which Godongwana outlined, there is no possibility this target will be realised in the short or medium term, especially given the huge levels of debt the country needs to address.
In an attempt to resolve the key issue that led to the postponement of the initial budget speech, namely, the proposed two percentage points on value-added tax (VAT), Godongwana reduced the proposed increase to half a percentage point, with a further possible increase of the same amount in the 2025/2026 financial year.
This would bring the total increase to a percentage point over the next two years.
To mitigate the impact of this VAT increase on households, the National Treasury has expanded the basket of zero-rated foodstuffs and opted for no increase in the general fuel levy.
Some government officials have defended this move, arguing that the increase is minimal and necessary.
The reality, however, is that even if the increase is just 0.5 percentage points, it will have a huge effect on the poor.
VAT is a regressive tax which hits low-income earners the hardest.
As such, even with an increase in social grants above inflation, higher VAT erodes the poor’s purchasing power.
Reflecting on the initially proposed 2% increase, a public finance expert argued that when a low-income family earning R240,000 annually spends R60,000 on basic necessities, the current 15% VAT already takes R9,000 (3.75% of their income).
With the proposed 2% increase, their VAT burden would rise to R10,200 — a R1,200 increase which represents 0.5% of their total income.
Meanwhile, for a higher-income household earning R2.4m, that same R1,200 increase represents just 0.05% of their income.
This same principle applies regardless of the percentage point(s) with which VAT is increased.
In addition to this, VAT increases drive inflation.
To counter this, businesses commonly pass on the hike to consumers through price increases or they reduce production costs by cutting jobs.
In a country with an official unemployment rate of 31.9% (which rises to 42% when using the expanded definition of unemployment which includes discouraged jobseekers) this is a deeply worrying proposition.
Thus, even with the expanded basket of zero-rated foodstuffs and an increase in social grants, inflation arising from the VAT increase is likely to erode their value.
The legislators sitting in the various parliamentary committees which are assessing the budget must strongly reconsider the increase in VAT.
There are various other alternatives to generating revenue.
The minister must revisit the “Policy Recommendations: Increasing SA’s Government Revenue Without Raising VAT” document which was prepared for the National Treasury in 2024.
The recommended instruments, such as expanding the tax base through strengthening compliance by increasing Sars’ capacity to detect and alleviate tax evasion, would be more effective in enhancing government revenue.
These mechanisms employ a more sustainable approach which does not suffocate South Africans who are already navigating an ongoing cost-of-living crisis.
The Herald
What are the alternatives to increasing VAT?
Columnist
Image: REUTERS/Esa Alexander
On March 12, after an unprecedented postponement in February, finance minister Enoch Godongwana finally tabled the budget in parliament.
The budget painted a sobering picture of the SA economy and there is no question the situation is deeply concerning.
The economy remains stagnant, recording a mere 0.6% growth in a country confronted with significant structural challenges whose resolution depend on sustained economic growth.
SA has the lowest rate of growth among emerging markets and is one of the slowest-growing African economies.
According to the National Treasury and the World Bank Group, to address the economic challenges and achieve sustainable development, the SA economy needs to grow at a rate of 5% or higher per annum, requiring a combination of policies focused on infrastructure, investment and skills development.
But with the fiscal constraints which Godongwana outlined, there is no possibility this target will be realised in the short or medium term, especially given the huge levels of debt the country needs to address.
In an attempt to resolve the key issue that led to the postponement of the initial budget speech, namely, the proposed two percentage points on value-added tax (VAT), Godongwana reduced the proposed increase to half a percentage point, with a further possible increase of the same amount in the 2025/2026 financial year.
This would bring the total increase to a percentage point over the next two years.
To mitigate the impact of this VAT increase on households, the National Treasury has expanded the basket of zero-rated foodstuffs and opted for no increase in the general fuel levy.
Some government officials have defended this move, arguing that the increase is minimal and necessary.
The reality, however, is that even if the increase is just 0.5 percentage points, it will have a huge effect on the poor.
VAT is a regressive tax which hits low-income earners the hardest.
As such, even with an increase in social grants above inflation, higher VAT erodes the poor’s purchasing power.
Reflecting on the initially proposed 2% increase, a public finance expert argued that when a low-income family earning R240,000 annually spends R60,000 on basic necessities, the current 15% VAT already takes R9,000 (3.75% of their income).
With the proposed 2% increase, their VAT burden would rise to R10,200 — a R1,200 increase which represents 0.5% of their total income.
Meanwhile, for a higher-income household earning R2.4m, that same R1,200 increase represents just 0.05% of their income.
This same principle applies regardless of the percentage point(s) with which VAT is increased.
In addition to this, VAT increases drive inflation.
To counter this, businesses commonly pass on the hike to consumers through price increases or they reduce production costs by cutting jobs.
In a country with an official unemployment rate of 31.9% (which rises to 42% when using the expanded definition of unemployment which includes discouraged jobseekers) this is a deeply worrying proposition.
Thus, even with the expanded basket of zero-rated foodstuffs and an increase in social grants, inflation arising from the VAT increase is likely to erode their value.
The legislators sitting in the various parliamentary committees which are assessing the budget must strongly reconsider the increase in VAT.
There are various other alternatives to generating revenue.
The minister must revisit the “Policy Recommendations: Increasing SA’s Government Revenue Without Raising VAT” document which was prepared for the National Treasury in 2024.
The recommended instruments, such as expanding the tax base through strengthening compliance by increasing Sars’ capacity to detect and alleviate tax evasion, would be more effective in enhancing government revenue.
These mechanisms employ a more sustainable approach which does not suffocate South Africans who are already navigating an ongoing cost-of-living crisis.
The Herald
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