A VAT hike of 0.75 percentage points is among the options presented to the National Treasury for consideration to enable it to fund the R60bn budget shortfall over the medium term.
Though the previous proposal to hike VAT by two percentage points, which would have added R60bn to the R2-trillion budget, was rejected by the cabinet in February, Business Day understands that an increase remains on the cards because the cabinet could not agree to back down on various “unaffordable” policies.
The Treasury is also exploring the viability of the Cosatu-backed proposal to use the Government Employees Pension Fund (GEPF) to raise about R53bn by withholding the employer portion of payments for one year.
However, this is not a preferred option because it is short term in nature, according to a source at the Treasury.
The draft budget pencilled in a real increase in spending of 0.9%, or R173bn, a year over the medium term that would have been mainly financed by the two percentage point increase in VAT. To cushion the poor, the Treasury proposed expanding the list of tax-exempt foods.
The latest funding options were presented to the Treasury by the task team led by deputy president Paul Mashatile during a special cabinet meeting on Monday.
The Treasury, which is in a closed period until the budget is presented on March 12, now has the discretion to choose the most viable options to offset the budget gap.
A VAT increase of 75 basis points remains moot as the DA remained firm during Monday’s meeting that it would not support any hikes in the tax.
DA leader and minister of agriculture John Steenhuisen said in a post on X on Tuesday: “Constructive discussions on the budget are ongoing. There is no agreement yet, but we are working towards a resolution by 12 March.”
Finalising the delayed budget is now in the hands of finance minister Enoch Godongwana and the Treasury as the cabinet has concluded its discussions on the matter without a decision on how to fund the budget shortfall.
The latest options take into consideration the “fiscal constraints of the country, mitigates the impact on the poor and middle-class-income households and supports economic growth”, the government said in a statement on Tuesday, but did not give more information on the options presented by the Mashatile team.
Citadel chief economist Maarten Ackerman said despite the rejection of the two percentage point VAT increase, the Treasury still had the option to increase it by a smaller amount.
“If they can’t increase any tax, it then boils down to cutting expenses where possible, though it won’t be easy especially on the social services ... If they don’t get the VAT hike and there is no counterbalance on cutting spending, to balance the budget means going back to the debt market, which they want to avoid,” Ackerman said.
Fedusa, a rival labour union federation to Cosatu, said it was against using the GEPF funding to plug the budget gap because “any action that weakens the fund could create future financial risks. If the GEPF’s funding drops below 90%, taxpayers would have to step in to cover the shortfall”. With Hajra Omarjee
Update: March 4 2025
This story contains new information throughout.
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