VAT increase still possible 

South Africans may still have to contend with a VAT increase in the postponed Budget Speech on 12 March, as it would boost investor confidence in the government’s fiscal consolidation efforts and prevent potentially harmful spending cuts. 

Finance Minister Enoch Godongwana’s Budget Speech on 19 February was unexpectedly postponed following opposition from parties in the Government of National Unity (GNU) to a proposed two percentage point VAT increase. 

For context, VAT is a consumption tax levied on goods and services at each stage of the supply chain. Ultimately, the end consumer bears the cost. 

While a higher VAT rate would generate critical revenue, critics argue it would burden already strained households.

The ANC, which lost its parliamentary majority last year for the first time since 1994, was forced to enter a coalition government with several parties, including its main partner, the DA, in the GNU. 

Differences within the coalition and the ANC have become evident, culminating in a last-minute disagreement over the VAT proposal that derailed the entire budget process.  

At Old Mutual’s internal economic briefing, chief economist Johann Els explained the rationale behind raising VAT, drawing attention to the broader economic picture. 

“Tax increases are never ideal, but we must keep an eye on the bigger goal of fiscal consolidation,” Els said. 

In a fragile economy, it’s crucial to strengthen public finances in a way that appeals to investors and credit rating agencies. 

“This might not be pleasant in the short term but may be necessary for South Africa’s long-term economic prospects,” he said.

“If the government chooses not to raise VAT, we could see severe spending cuts jeopardising critical areas like health, education, or social grants. One has to decide which route is ultimately the least damaging.”

It must be noted that the VAT increase was going to be mitigated by a range of other factors that the National Treasury considered. 

This included a higher-than-inflation increase in social grants, no fuel levy, and extra zero-rating of meats and tinned vegetables, among other things. 

Els also noted that the current debt-to-GDP ratio hovers at around 75%, necessitating firm steps to rein in deficits. 

He emphasised that a higher VAT rate spreads the tax burden more widely, unlike targeted hikes in personal income tax that can drive high-net-worth individuals to seek avoidance strategies. 

From an investment perspective, demonstrating fiscal discipline could trigger positive reactions, such as improved credit ratings, enhanced foreign inflows, and eventually greater economic stability.

Though he supports the principle of strengthening the fiscal position, Els said there are clear drawbacks with the plan. 

“Ultimately, Parliament may still opt for a different mix of tax increases and expenditure cuts. The proposed 2% VAT hike is just one potential tool.” 

“Either way, the government must present credible policies that reduce the deficit. If it doesn’t come from indirect taxes, it has to come from direct taxes or from cutting essential services, both of which could have deep social consequences.”

The last increase to VAT, from 14% to 15%, was implemented in 2018 and has actually generated less revenue than the government expected. 

This was largely due to the increase being imposed when the South African economy was extremely weak and consumer spending was under pressure. 

If the VAT increase is implemented in the coming years, the local economy should be in a much better position than in 2018 and, thus, it should result in increased revenue. 

The ANC’s largest partner in the GNU, the DA, has signalled its continued resistance to tax hikes and has proposed alternatives to bolster economic growth. 

It has also called for a spending review to cut some government expenditure that is not having the desired effect. 

“It is now five minutes to midnight for our economy and the fiscus,” DA leader John Steenhuisen said. 

“In the short term, we can absorb the shortfalls we face, but unless we generate the growth required to shift our trajectory, we risk being unable to fund even the most basic needs of our people and abandoning them to a wasteland of poverty from which there is no escape.” 

The DA also wants the administration to accept a “free regulatory review” from the World Bank to help cut red tape and an immediate reduction in tariffs that weigh on the competitiveness of local manufacturers.

There should also be labour-market reforms to boost employment and changes to public procurement processes to promote transparency and cost savings, Steenhuisen said.

To encourage investment and lift growth, the state should make equity alternatives available in place of these ownership requirements, as it has done in the automotive sector. 

“The reality is that we strive to implement our national priorities in a context of slow growth, limited revenue, high unemployment and a large social wage,” he said. “The state is simply not able to fund every priority and ambition.”

Some more immediate-term alternatives include the imposition of a wealth tax on high-net-worth individuals and increased sin taxes.