As South Africa grapples with budgetary constraints, economists clash over the proposed 2% VAT hike that Finance Minister Enoch Gondongwana was set to announce and its potential impact on the economy.
Image: Elmond Jiyane/GCIS
Increasing VAT (Value Added Tax) by 2% was not the only option that the Minister of Finance Enoch Godongwana had to do to secure more funds for South Africa's budget surplus, which currently amounts to just under R60 billion.
This is according to economist Patrick Bond.
Bond stated that the proposed VAT hike exemplifies the extreme insensitivity that the National Treasury has been known for since apartheid, as well as its non-consultative approach rooted in austerity, particularly since the implementation of the 1996 GEAR policy.
The other option that Godongwana had was to raise the corporate tax rate, which was 51.5% in 1992 and is now 27% (and 15% in Special Economic Zones), according to Bond.
Bond said: "To do so, and to prevent capital flight, would then require tighter exchange controls."
Economist Azar Jammine said that other options would be to increase personal income tax but South Africa already has one of the highest tax regimes in the world.
"Some were talking about a wealth tax. Well, that has already been considered. It's quite logical to consider a wealth tax because there is a very skewed distribution of wealth in South Africa where a fairly small minority earn a huge amount of money and assets. But research has shown that the benefit one would get from such a tax will be relatively small. Many of the assets that the wealthy own are overseas and are not necessarily subject to direct tax."
The Minister of Finance was set to deliver the 2025 Budget Speech on Wednesday, but at the last minute, it was postponed.
It is believed that a proposed 2% VAT hike was one of the main reasons behind the disagreement between the Government of National Unity (GNU) Cabinet ministers.
In his Speech, he said that the proposal to raise the VAT rate by 2 percentage points to 17 percent was a necessary step that will enable us to:
- Fund public sector wage increases for our civil servants
- Expand early childhood development opportunities for our children
- Retain the teachers, doctors, and essential frontline workers that serve our communities
- Revitalise our commuter rail system to better serve working-class families
- Provide above-inflation increases to social grants for our most vulnerable
Godongwana said: "Madam Speaker, this decision was not made lightly. We thoroughly examined alternatives to raising the VAT rate and the policy trade-offs involved, including increases to corporate and personal income taxes."
"However, these would generate substantially less revenue while potentially harming economic growth and job creation."
On whether the Finance Minister will stick to the 2% VAT increase, Bond said: "There is an interesting configuration of forces in which allegedly pro-poor populism from the Democratic Alliance is suddenly a factor."
"Everyone is used to the 'talk left, walk right' dance of South African politicians. But the other major factor in play now is civil society unity against VAT increases represented by all the different progressive factions coming together to protest. With the ANC in such rapid electoral decline and facing more municipal losses next year, Godongwana and his staff look lonely and defeated."
Jammine said he doubts that the Finance Minister will stick to his 2% VAT hike in his new Budget Speech to be delivered on March 12.
"You can see from the reaction of relief to the postponement of the budget from the ordinary man on the street. The increase in the VAT rate would be extremely unpopular, probably more unpopular than most other measures that can be taken including lower wage increases to public servants and the like," Jammine said.
"The populace would argue just borrow the money and pay more interest. Live for today than worry about tomorrow."
IOL Business
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