While the DA and EFF loudly celebrated its so-called “VAT victory”, surprisingly little attention has been paid to the actual consequences of shifting from budget 2.0 to budget 3.0, and the costs that came with it. Did we throw the baby out with the bathwater?
The fallout from the abandoned VAT increase may be far more damaging than the DA and EFF would have us believe. To offset the political toxicity of VAT, the Treasury leaned into a fuel levy increase, an arguably more harmful alternative given the knock-on effects for transportation costs in an economy heavily reliant on road transportation for freight and public transport.
Meanwhile, all the social support mechanisms attached to the original VAT proposal — above-inflation grant increases, an expanded list of zero-rated goods and initial relief for bracket creep — were discarded. So again, was budget 3.0, and the “VAT victory”, really worth it?
It would be unfair to place blame on any single actor, but there were clear missteps. The Treasury arguably erred first by tabling Budget 2.0 with minimal government of national unity (GNU) consultation and no clear path to passage. For a seasoned minister with deep experience in political negotiations, this was a surprising oversight — one that set up the budget standoff from the outset.
The ANC, still adjusting to life without a parliamentary majority, found itself outmanoeuvred as opposition parties capitalised on the VAT increase to score public points. The EFF and DA, strange allies in any context, teamed up to torpedo the fiscal framework on procedural grounds, while other parties, including my own, were engaged in negotiations to find alternatives to the VAT increase. Ultimately, all of this forced the Treasury to withdraw it altogether.
Away from the core budget content the political dynamics became clearer. The ANC demonstrated it could operate without DA or FF+ support, while ActionSA and Bosa appeared increasingly open to collaborating with the ANC. This should surprise no-one who is familiar with coalition politics, where shifting alliances are par for the course.
Turning VAT into a political third rail, thanks largely to the DA, meant the Treasury had to turn elsewhere for revenue, landing on the fuel levy. The irony is bitter: most workers and goods are transported by road, and the increased fuel costs will ripple through the economy. That irony deepens when you consider the Passenger Rail Agency of SA’s much-needed investment was slashed in budget 3.0.
The damage doesn’t stop there. Compared to budget 2.0, the new budget makes medium-term cuts to both health and education, each losing just under R10bn. That’s nearly the same R12.5bn in first-year revenue the VAT increase would have generated. The Treasury insists these aren’t cuts, merely reductions in projected future spending. But for the affected departments the effect is functionally identical.
Home affairs is another casualty. Its budget for human resource capacitation and digitisation was trimmed, with the staffing component removed entirely despite minister Leon Schreiber’s clear and public pleas for more personnel.
While changes to debt-to-GDP ratios and growth forecasts are partially a product of delayed tabling and shifting economic indicators, budgets serve as signals to both investors and creditors. These adjustments confirm what many suspected: international (and to some extent, domestic) economic confidence is waning.
Had budget 2.0 been tabled and passed earlier, we might have bought ourselves more time, until at least the October medium term budget policy statement.
For context: if a person spends R7,500 on VAT-liable goods a VAT increase to 15.5% would have meant paying R1,162.50 instead of the current R1,125. That’s a difference of just R37.50.
So here we are … was that small tax increase really worse than the billions cut from social grants, infrastructure and key public departments? That’s the trade-off budget 3.0 represents. Many political parties seem comfortable with that decision. Are you?
• Herron is secretary-general of the Good Party.
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