VAT increase still on the cards for South Africa

South Africans may face a VAT hike next year if the National Treasury fails to find areas to make government spending more efficient and SARS fails to close the tax gap. 

This is feedback from Old Mutual Wealth chief investment strategist Izak Odendaal, who explained that the difficult choices do not stop with the Budget presented on 21 May. 

Odendaal explained that it is crucial for Finance Minister Enoch Godongwana to confirm the government’s commitment to fiscal consolidation in the Budget. 

This is important to rectify South Africa’s deteriorating state finances and maintain the National Treasury’s credibility with investors. 

Victor Mpunga, head of research at Private Clients by Old Mutual Wealth, pointed out that the final Budget remained committed to stabilising the debt-to-GDP ratio in the current year, just as versions 2.0 and 1.0 had, and kept bond issuance unchanged. 

This consistency supports the local bond market, the rand, and locally exposed companies, even if it was largely anticipated. The Treasury’s unwillingness to deviate from its fiscal path has become almost predictable. 

Moody’s decision to reaffirm the country’s credit rating with a positive outlook days before the budget highlights the increasing confidence that market participants are beginning to have in the Treasury’s fiscal discipline.

This is all despite the government’s reversal of its initial plans to hike VAT to increase revenue by R75 billion over the next three years. 

The reversal of this hike and a weaker economic outlook are expected to result in tax revenue declining by R61.9 billion over the next three years compared to the forecast in March. 

A combination of an inflation-linked increase to the General Fuel Levy and spending cuts to several programmes is plugging this gap. 

The government will also rely on SARS to begin closing the tax gap, estimated at R800 billion in South Africa, to cover any additional spending obligations it picks up throughout the financial year. 

VAT hike still possible

Despite plugging the gap for the current financial year, it is not enough for the coming fiscal years, with the Treasury warning that some measures may have to be repeated next year. 

This may include another year without an inflationary increase to income tax brackets and a further increase in the General Fuel Levy. 

However, Odendaal said the Treasury also said that other, unspecified tax measures might have to be taken in the coming financial years. 

As expected, there will be no VAT increase this year. However, unspecified tax hikes are pencilled in from next year to raise around R20 billion per year.

This suggests a small VAT hike could be back on the table, but Treasury will be sure to get political buy-in beforehand, he said. 

If SARS improves collection, tax measures will not be necessary, and the Revenue Service will get R4 billion to strengthen its capacity. 

The Treasury did not include any savings estimates in the budget from the reviews but highlighted that any such savings would negate the need for additional tax increases.

Without revenues from a VAT hike, some of the additional spending proposed in the first two attempted Budgets will be rolled back. 

Nonetheless, the baseline will still increase by R180 billion over the medium term, compared to R233 billion in Budget 2.0. 

This will support frontline delivery and infrastructure spending. Treasury plans to spend R1 trillion on infrastructure over the medium term.

All of this implies further cuts to other spending areas or further revenue measures, provided economic growth does not substantially rise by some means. 

In Odendaal’s view, this makes the need to see improved SARS debt collection and thorough spending reviews a notable risk worth watching over the short and medium term.