Finance minister Enoch Godongwana, desperate to plug the gaping hole in South Africa’s fiscus, ignored warnings from all sides that his plan to hike VAT was doomed to failure.
Sources in both the ANC and the DA told the Sunday Times Godongwana was repeatedly told that his proposal for a two percentage point increase to 17% would not fly.
In the end, his decision to ignore objections meant his budget speech had to be cancelled on Wednesday, the first time this has happened in the democratic era. In spite of the setback, President Cyril Ramaphosa came out in support of his beleaguered finance minister.
DA federal chair Helen Zille told the Sunday Times she held several meetings with Godongwana in the past fortnight at which it was made clear the party opposed any increase in VAT.
“There were several meetings that were happening, the contents of which were confidential,” Zille said. “All I am at liberty to say is that the DA made it clear we would not support a tax increase.”
It is believed Godongwana turned a deaf ear to the DA deputy finance minister, Ashor Sarupen, when he argued against an increase in VAT.
Godongwana informed key players of his intention to raise VAT at a meeting on February 5, the eve of the state of the nation address, but did not spell out the size of the proposed increase.
Senior ANC leaders said members of his own party warned Godongwana, only minutes before he took his proposal to the GNU cabinet on Wednesday, that the hike was unacceptable. But he proceeded regardless.
The fight is expected to be taken up at a meeting of the ANC national working committee tomorrow and at a special cabinet meeting later in the day. A senior ANC leader said Godongwana would have brought the proposals he received from the DA.
“The DA made proposals to him and they are complaining now saying Enoch has been arrogant on this thing and I'm afraid Enoch may not survive this because he's never really had a constituency, his constituency has always been the markets. Now if the markets feel that he was arrogant even as they spoke to him, he didn't say 'I will think about it' he said to them 'this is the ANC position' and it is not the ANC position.
"He said if the DA is not going to support it the ANC will support him and that this thing will pass whether the DA wants it or not. So that's what made them jumpy because he was not willing to even listen to their proposals and those proposals apparently are very good.”
Godongwana, who is now due to present the budget on March 12, is under pressure of fill a R60bn tax hole.
He is very arrogant. We don’t know who he consults because he is ignoring all structures. Did he really expect us to support a VAT increase when our people are struggling with the cost of living? No way
— ANC cabinet minister
If the cabinet refuses to approve any increase in VAT, the finance minister will have to make significant adjustments, including reversing the plan to add more items to the zero-rated basket.
Other likely options include hiking the fuel levy and raising sin taxes dramatically.
The government could also be forced to draw from its reserves, and possibly cut spending on such items as defence and highway renovation.
If a VAT hike of a single percentage point is approved, this could still mean reversing the cut in corporate tax implemented in 2022 and adjusting income tax brackets.
The government’s spending commitments include R35bn for Covid social relief of distress grants, R23.4bn for the 2025 public service wage agreement, and R11bn for early retirement payments.
These pressures are said to be the reason Godongwana persisted in seeking his VAT increase.
A senior DA source said Sarupen had proposed that instead of raising VAT, Godongwana should go for radical hikes in sin taxes and raise indirect taxes such as the fuel levy.
Together with other options, such as revision of diesel rebates, the Sarupen proposals could result in extra revenue of least R20bn, the source said.
Sarupen is said to have urged Godongwana to stick to the medium-term budget statement tabled in parliament last year, which kept a tight rein on state spending.
But the minister apparently rejected this advice.
“Sarupen argued that raising VAT is counterproductive as it does not necessarily help raise a lot of money,” the DA source said. “The evidence is that when you raise VAT, it pushes people to buy cheaper goods and services. The reality is that VAT has underperformed by R90bn since it was raised in 2018.”
Sarupen declined to comment when approached on Friday.
Another DA leader said the party was determined to stand its ground at the special cabinet meeting tomorrow.
“There’s no backing down from our side. No 0.5%, no 1%, no 2%. The middle class and South Africans in general are already overburdened and overtaxed.”
The DA has argued that the government should reprioritise some of its spending plans. It says R23.9bn could be saved by closing the sector education & training authorities (Setas) and the national skills fund, which it says have been plagued by corruption and governance inefficiencies.
The party says the Treasury itself is wasting R2.9bn a year on its internal financial relations expenditure, which is “unaffordable in times of financial distress.”
DA finance spokesperson Mark Burke said the national youth development agency, which cost R717m a year to run, could be scrapped.
“Youth development is already baked into the mandate of many government departments and other programmes, a separate agency is not needed.”
The mistake is if we cancel this VAT [increase] completely and come back with something, that will make the DA celebrate. Then it will mean the DA controls the budget. If we change from VAT to something else, it must be something you think is going to work but also is not determined by the policy choices of the DA
— Senior ANC leader
One ANC minister, speaking on condition of anonymity, said Godongwana’s cabinet colleagues only found out the details of his proposals at the meeting on Wednesday.
The minister said Godongwana’s failure to consult in advance about the two percentage point hike was the final straw.
“He is very arrogant. We don’t know who he consults because he is ignoring all structures. Did he really expect us to support a VAT increase when our people are struggling with the cost of living? No way.”
A member of the economic transformation subcommittee of the party’s national executive committee said members had asked Godongwana to share his plans with them but he repeatedly ignored the structure.
This source said the subcommittee would never have supported a VAT increase because the cost of living was too high for ordinary people.
In a presentation to the ANC’s lekgotla two weeks ago, the subcommittee warned that the basic cost of living was far outstripping inflation. It listed transport, electricity and nutritious food as being worst hit.
“Some households, especially those earning the minimum wage, are struggling to keep afloat,” the presentation said.
It pointed out that the cost of living pressure had been worsened by the recent 12.72% tariff increase granted to Eskom. Most black families earning the national minimum wage of about R4,400 were struggling to cope.
“For black South Africans workers, one wage typically supports 3.8 people. Dispersed in a worker’s family of four persons, the national minimum wage is reduced to R1,161 per person — this is below the upper-bound poverty line of R1,558 per person per month.”
The subcommittee urged the lekgotla: “Deepen and accelerate structural reforms to bolster competitiveness and make it easier for businesses to operate and invest in the economy, supporting growth.”
Complicating the ANC’s search for a way to find extra revenue is its aversion to handing the DA a public relations victory.
“The mistake is if we cancel this VAT [increase] completely and come back with something, that will make the DA celebrate,” said a senior ANC leader.
“Then it will mean the DA controls the budget. If we change from VAT to something else, it must be something you think is going to work but also is not determined by the policy choices of the DA.”
— Additional reporting by Sibongakonke Shoba
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