VAT increase warning for South Africa

Many economists warned that South Africa may have to significantly increase value-added tax (VAT) to fund the government’s growing expenditure, which is counterproductive.

The National Treasury recently revealed that South Africa recorded its largest budget deficit since at least 2004.

The budget moved to a deficit of R143.8 billion for July, much wider than the R115.5 billion forecast by economists.

The growing deficit means that South Africa has to borrow more money to plug the gap, which in turn increases the debt levels.

Efficient Group chief economist Dawie Roodt warned that South Africa’s deficit and debt levels are approaching dangerous territory.

South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. In nominal terms, the country owes around R5 trillion.

At the current trajectory, Roodt expects the debt-to-GDP ratio to reach 76% in the current financial year and increase to 80% the year after that.

“A debt-to-GDP ratio of 80% for South Africa is getting into dangerous territory,” Roodt warned.

The National Treasury has proposed drastic steps to rein in spending as the government has run out of money and faces a debt trap.

However, the government is not keen on reigning in spending, especially ahead of a general election where the ANC faces a challenge to maintain an outright majority.

President Cyril Ramaphosa, for example, said lower spending is not necessarily the answer to the country’s fiscal challenges.

“What should we do? The discussion is ongoing. It is not necessarily cutting spending. It is seeing how best you focus on your key delivery areas,” he said.

If significant spending cuts are off the table, the only options are to raise taxes or borrow more money.

Finance Minister Enoch Godongwana hinted about tax increases to fund the government’s growing expense bill.

Godongwana said the likely solution would be a combination of raising taxes, borrowing more money, and reducing government spending.

When it comes to increasing taxes, a VAT hike is the most logical way to raise more money for the state.

Azar Jammine, director and chief economist at Econometrix, told ENCA that the government may be forced to increase value-added tax.

He said consumer spending is under pressure because of lacklustre economic growth and high interest rates.

“The next step is that the government may need to raise the rate of VAT to fund a lot of its expenditure on social services,” he said.

“That is a zero-sum game. You raise taxes and get lower growth, which in turn harms government revenue and forces the government to borrow more.”

Trade union Solidarity also believes the National Treasury’s proposal to increase VAT by up to two percentage points to supplement government revenue is a bad idea.

“Any attempts to increase taxes will not have the desired effect, and in such a case, the Treasury will be trying to get blood from a stone,” it said.

“The solution to the expected budget deficit must be sought on the expenditure side. The state needs to rein in spending and relinquish more of its tasks to the private sector.”

The union said the real solution is economic growth and advised policies to boost the economy rather than increase taxes, which will hurt growth.