The finance minister’s blocked VAT hike would have left SARB Governor Kganyago in a bind, complicating his efforts to control inflation
By Vernon Wessels
Either way, finance minister Enoch Godongwana’s budget speech last week would have been a historic moment in South Africa’s history.
Had he pushed through a shock two-percentage-point VAT hike, it would have been the biggest increase since democracy. Instead, it was blocked, and he had the dubious honour of becoming the first post-apartheid finance minister not to take the podium and deliver his budget speech.
The Democratic Alliance (DA) says he, and the African National Congress (ANC) brought this upon themselves. Both ignored the DA’s pro-economic growth proposals and kept the details of the VAT hike secret.
As it was, members of the Government of National Unity (GNU), including the DA, were only briefed on the VAT increase on the morning of the speech. This led to an emergency meeting where no consensus was reached. Godongwana opted not to deliver a budget speech he knew would never be approved by Parliament.
By not providing cabinet enough time to deliberate contentious issues, it shows that the National Treasury is “underestimating how the GNU has reshaped political dynamics in South Africa”, says Casey Sprake, an economist at Anchor Capital.
More concerning, it raises questions about the DA’s deputy finance minister Ashor Sarupen’s “level of involvement in the process”, she says, and “whether Treasury sufficiently anticipated these challenges”.
“Over the coming days, clarity should emerge on whether the proposed VAT hike truly blindsided the DA or if it leveraged the delay to assert its influence within the GNU – both possibilities could be true,” Sprake says.
Serious about debt
Most economists, including Sprake and Azar Jammine, the chief economist for Economextrx, weren’t too concerned about the postponement in the budget, which will now take place on March 12.
“I was quite encouraged,” says Jammine. “This is precisely what the GNU is all about.”
While the VAT increase was blocked, it showed that National Treasury is serious about addressing the budget deficit and tackling debt, sending a “favourable message” to financial markets, says Jammine. “They don’t want debt to spiral out of control, so that’s positive.”
Value-Added Tax (VAT) was introduced in South Africa in 1991, replacing the General Sales Tax (GST) at 10%. While both VAT and GST are indirect consumption taxes, VAT is charged at each step of the supply chain, whereas GST is charged only at the final point of sale.
In 1993, before South Africa’s first all-race elections, protests led to the inclusion of nine more zero-rated food items under VAT, as the rate was raised from 10% to 14%. At that time, finance minister Derek Keys met with the ANC and Congress of SA Trade Unions, and they all agreed a VAT hike was necessary to manage the country’s debt and spur economic growth.
Then in 2018, after widespread corruption under President Jacob Zuma, finance minister Malusi Gigaba raised VAT from 14% to 15%. Gigaba handled this increase well by signalling the move in advance and phasing in the tax.
Adding to inflation
Maarten Ackerman, Chief Economist at Citadel, says the 2018 VAT hike added an extra 50 basis points to inflation. While inflation is currently low, at 3% in December, the cost of living remains high. “All in all, it’s not great for the consumer,” he says.
Anchor’s Sprake says any VAT hike would have hurt efforts by the South African Reserve Bank’s (SARB) to protect the most vulnerable by managing interest rates.
“Governor Lesetja Kganyago has even suggested lowering the inflation target from 4.5% – the midpoint of the current 3% to 6% range – further underscoring the disconnect between fiscal and monetary policy.”
The VAT hike would likely have weighed on household consumption and added to inflationary pressures, potentially delaying interest rate cuts.
“By opting for a VAT hike, the Treasury has chosen one of the more regressive fiscal measures,” Sprake says, “placing it at odds with SARB’s mandate to protect purchasing power.”
