Political brinkmanship has been the order of the day since February 19 when an incensed cabinet pushed back against a two-percentage-point VAT hike.
Since then, President Cyril Ramaphosa and finance minister Enoch Godongwana have been walking on eggshells trying to convince the GNU partners this is the lesser of all the revenue generation evils.
Difficult decisions have to be made if we are to avoid a national crisis that could inflict even more pain on already strained South Africans.
The government can go back to the markets and borrow the R112bn it needs to plug the revenue gap. But then what happens to debt service costs? This financial year alone, the government will pay R424.9bn in interest on just over R6-trillion owed to bondholders and other institutional lenders. Interest on debt will soon equal expenditure on health (R298.9bn) and policing (R133.4bn) combined. It already surpasses what we spend on social development (R422.3bn).
This is unsustainable and is the main reason the Treasury is not deviating from the fiscal consolidation path. Since the rejection of the February 19 budget, it has had to revise spending plans and tweak borrowings higher to make up for the shortfall. The debt-to-GDP ratio is revised from 76.1% to 76.2% — dangerous levels. The IMF and the World Bank cite a 60% ratio as an indicator of manageable debt levels for emerging-markets.
The debt-to-GDP ratio is revised from 76.1% to 76.2% — dangerous levels. The IMF and the World Bank cite a 60% ratio as an indicator of manageable debt levels for emerging markets
The other options — also rejected by the Treasury — were raising corporate tax and personal income taxes.
South Africa’s corporate tax rate of 27% is marginally above the levels of OECD countries and emerging market peers. Mining, which traditionally contributes handsomely to the fiscus, is hobbled by Transnet and Eskom. Mining companies are sitting with production stockpiles because Transnet doesn’t have enough trains to rail these to ports. Taxing them more in this economic environment is a sure-fire investment deterrent.
Salaried taxpayers have not escaped personal income tax hikes. Godongwana’s budget did not adjust their tax brackets for inflation for a second year. This effectively increases the tax burden on these individuals — a phenomenon known as “fiscal drag”. There are also no inflationary adjustments to medical tax credits.
Godongwana and the Treasury had little room to manoeuvre and the VAT hike was the only realistic option. They have opted for two 50 basis point increases that will push it to 16% by April 2026.
However, critics of VAT increases are not wrong either. They contend that low-income households will bear a disproportionate burden since they spend a larger percentage of their disposable income on food and goods subject to VAT.
The impasse has deepened ructions in the GNU. The DA says it does not support this budget, but it’s now common knowledge it wasn’t opposed to a 50 bps hike. It dangled other conditions such as provincial involvement in the concession of the Port of Cape Town and reversal of the nil-compensation clause in the Expropriation Act — both of which the ANC rejected.
It’s now left to parliament to approve the fiscal framework. An existing law allows MPs to amend the budget should they wish to. The problem is that the VAT increase kicks in automatically on May 1 regardless.
We are heading for a monster crisis if the political parties in the GNU and those outside it can’t find middle ground on the budget soon.
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