Anticipation is mounting as the clock ticks down to the budget, take two, on Wednesday. At the heart of the drama, ever since the deadlock over a proposed two percentage point VAT hike, has been the question of whether the government will resolve its fiscal dilemma by trying to squeeze more revenue out of an exhausted tax base, or focus instead on accelerating economic growth-enhancing reforms.
As Winston Churchill once put it: “For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
This is especially true when tax revenue consistently fails to keep pace with expected gains from tax increases, indicating that the capacity of the tax base to absorb further increases has been exceeded.
Given the broad hostility to a VAT increase, on the one hand, and the pressure for increased social spending, on the other, the government may be tempted to opt for larger increases in excise taxes on alcohol to make up the difference. On the face of it, this would be much easier to justify, but it is highly unlikely to deliver a significant windfall for the Treasury.
For one thing, nominal alcohol excise revenue collections have begun to slow down over the past 10 years, dropping from 9.6% compound annual growth to 7,4% to 5,4% across a 5-year, 3-year, and 2-year horizon, respectively. This declining trend in revenue collections contradicts the generally accepted belief that higher excise taxes will continue to deliver more tax revenue — the reason this is happening is, however, the issue that is being overlooked and requires more in-depth discussion: the growth in the availability of illicit alcohol. According to the World Health Organisation, the illicit alcohol market is the second largest alcohol category in South Africa.
As the price gap between legal and illicit products widens through higher excise taxes, consumers are migrating in greater numbers to illicit products. Research indicates that legal alcohol was on average 43% more expensive than illicit alcohol in 2020, helping to grow the share of illicit trade to 22% of the total alcohol market by volume.
Radical increases in alcohol excise taxes will therefore not bring in significantly more revenue, they would simply drive more people to consume illicit products while suffocating the legal industry.
If the Treasury really wants more revenue from the alcohol industry, the best course would be to clamp down on the illicit trade, where an estimated untapped revenue pool of R11.,3bn currently sits outside the fiscus.
Considering the enormous challenges of poverty and inequality facing South Africa, it makes little sense to throttle a legal alcohol industry which makes an outsized contribution to the economy and employment, to the benefit of an illicit trade which is a drain on the fiscus and a contributor to crime and instability.
It is a fallacy that legal alcohol consumption is growing out of control in South Africa and should therefore be taxed at extreme levels
With an output multiplier of 2.7, every R1m in output produced by the alcohol beverage industry generates an additional R2.7m in output in the rest of the economy, much higher than the output multiplier of the average South African industry, estimated at 1.8. The liquor industry is therefore an exceedingly valuable driver of production in the South African economy.
A report commissioned by the Drinks Federation of South Africa (DFSA) in 2024, estimated the contribution of the industry to be sustained economy-wide output (or production) to the value of R482.7bn, supporting 498,999 jobs, generating R215.5bn in household income, impacting the livelihoods of 1.15-million people and contributing R226.3bn (3.6%) to the country’s GDP in 2022.
Furthermore, it is a fallacy that legal alcohol consumption is growing out of control in South Africa and should therefore be taxed at extreme levels.
According to the WHO, consumption of legal alcohol in 2024 was projected to be below 2014 levels, illustrating that consumption has not grown in the past decade. Second, the cost to consumers of legal alcohol has increased by 186% since 2014, ahead of consumer price inflation growth of 117% over the same period. This means it has, on average, become less affordable since 2014.
This data demonstrates the need to focus the urgency once again on dealing with the relative affordability of illicit alcohol, rather than attempting to address solely the cost of legal alcohol through excise increases.
As the GNU weighs its budget options, the temptation to compensate for the rejected VAT increase with seemingly quick-fix solutions such as a dramatic hike in “sin taxes” runs the risk of not only failing to deliver big wins for tax revenue, but also restricting the legal alcohol industry’s potential to contribute to elusive economic growth, while fuelling the growth of the illicit trade and all the societal damage that entails.
• Ntimane is the convener of the National Liquor Traders
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.