South Africa dodged a bullet

South Africa’s postponed 2025 Budget would have imposed R182.4 billion of net new tax measures over the medium term and presented significant unfunded expenditure risks.

The 2% value-added tax (VAT) hike the government planned to introduce would have also shifted the burden of fiscal consolidation onto taxpayers rather than the government.

The Bureau for Economic Research (BER) recently analysed the Budget the National Treasury planned to present.

Finance Minister Enoch Godongwana was set to table South Africa’s 2025 Budget on Wednesday, 19 February.

Earlier that week, the DA, which forms part of the Government of National Unity (GNU), warned it would not approve a Budget that introduced tax hikes for South Africa.

On the day the Budget was set to be presented, President Cyril Ramaphosa called an emergency Cabinet meeting.

This meeting was intended to get all coalition partners to sign off on the Budget, but the parties could not reach a consensus.

Therefore, in an unprecedented move, the Budget was postponed to 12 March to give the GNU time to reach an agreement.

Following this postponement, DA leader John Steenhuisen revealed the crux of contention in this Budget – the National Treasury wanted to implement a 2% hike in the value-added tax (VAT).

According to the National Treasury, the VAT rate increase was unavoidable to ensure adequate funding for policy priorities while maintaining fiscal sustainability. 

However, the Budget proposed several measures to “cushion the blow” to vulnerable households.

This includes further zero-rating other basic goods, extending fuel levy relief, providing for above-inflation adjustments to social grants and a full inflation adjustment of the bottom two personal income tax brackets.

The BER said the 2% VAT hike was intended to keep the government’s debt stabilisation plan on course. 

The Budget showed that this hike would see the government’s debt ratio stabilise this year, though slightly higher than before.

In addition, more funds would have been shifted towards infrastructure investment and protecting frontline services and the poor.

The BER warned that it would have come at a significant cost to the taxpayer.

“Our suspicion has always been that a VAT hike would potentially be used to fund a Basic Income Grant (BIG) or the rollout of National Health Insurance (NHI),” the BER said. 

“If the aborted budget had been tabled, that tax wiggle room would have all been used up.” 

“And even then, there was nothing new in the budget for Transnet or to permanently fund the social relief of distress (SRD) grant. So, significant unfunded expenditure risks remained.”

The BER said it is important to highlight that the 2024 Budget was described as “striking a balance” between R15 billion worth of tax measures and R80.6 billion in expenditure cuts over the medium term.

In contrast, the postponed 2025 Budget would have imposed R182.4 billion of net new tax measures over the medium term but no new expenditure cuts.

The organisation explained that the additional revenue would allow the National Treasury to ease the spending brakes.

The postponed Budget consolidated non-interest spending, growing by 0.9% on average annually in real terms over the medium term. Previously, the plan was for non-interest spending to contract by 0.5% a year on average. 

In other words, government spending would have grown under the postponed Budget rather than contracted.

“This represents a looser fiscal stance, and, while this is being achieved without a meaningful deterioration in the country’s debt metrics, a shift in the burden of adjustment,” the BER said. 

“Whereas previously, the brunt of austerity was being felt in frontline government education and health services, it has now moved onto all taxpayers through a higher VAT rate.”

Therefore, taxpayers would have paid the price for the country’s ailing fiscus rather than the government.

The BER said this would especially impact higher-income earners because the government failed to fully provide for bracket creep for the second year in a row or adjust medical tax credits.

The organisation highlighted concerns that the VAT increase would likely dampen consumer spending and weaken economic growth, which would be counterproductive.

However, the Budget Review noted that studies have shown that increasing VAT will have the least detrimental effect on economic growth and employment relative to increases in personal or corporate income tax.

The BER explained that, from a practical perspective, the discussion among GNU parties and the Treasury will likely turn into one about trade-offs. 

“If they are adamant about not raising VAT, there is no money for the ‘new’ expenditures – so what will they be willing to forfeit, or where else could the money be found?” the BER said.

“It is also important to highlight that the Treasury’s assumptions about the revenue that the VAT hike could bring in are, in our view, optimistic.”