The last time VAT rate was raised was in the February 2018 budget, to fund the huge expansion of student aid in the wake of the countrywide Fees Must Fall protests.
Go back to the medium-term budget policy statement of October 2017 and there was a detailed costing of the extra spending that was required, along with a warning that such structural increases in expenditure to accommodate new policy initiatives would have to be matched by parallel tax increases.
“None of the options are free of pain,” read the statement, which added that a team of cabinet ministers had been established to develop proposals to stabilise the national debt.
A possible VAT increase was mentioned and there were extensive discussions about this in the run-up to the 2018 budget. It wasn’t uncontroversial. But it went through.
This time none of that happened. There was no indication in November’s medium-term budget statement that finance minister Enoch Godongwana was about to change his fiscal strategy from spending cuts to “tax and spend”, nor any indication of big tax changes to come.
Going into budget day on February 19, the minister didn’t seem to have any sort of political strategy to lobby for a VAT hike, which was guaranteed to be controversial. He evidently relied on not being required to get the cabinet’s approval. In theory, the finance minister needs the cabinet to sign off the fiscal framework, but how he funds it is his prerogative.
Tax proposals have traditionally been kept within a tight circle of the minister and select officials ahead of budget day to prevent anyone rearranging their tax affairs ahead of time to avoid hikes. That worked fine when the ANC governed alone; Godongwana and his boss, Cyril Ramaphosa, don’t seem to have recalibrated a budget strategy for the GNU world.
Meanwhile, the Treasury had taken a gamble. It bowed to political pressure from all sides to increase spending. But it funded this in the most reliable, least economically damaging way — a hike in VAT. Officials surely knew they might not pull off the full two percentage points, but they hoped it would at least be debated in parliament.
In the event, the February 19 budget didn’t even make it that far. The outcome might have been different had Ramaphosa chaired the cabinet meeting on budget morning, at which ANC ministers reportedly led the charge against a VAT hike. But the president’s plane had been grounded because of a cracked windshield, and he was on a commercial flight to Cape Town. So deputy president Paul Mashatile chaired the crucial cabinet meeting. The budget was delayed.
Whether consensus among the GNU partners can be forged in time for an amended budget to be tabled next week is not yet clear. What is clear, as Wits University academic and former budget office head Michael Sachs puts it, is that SA needs new budget institutions.
We urgently need to change the way the budget is crafted to take into account that it is the fiscal expression of a coalition government, not a dominant party. Indeed, until the GNU has a fiscal strategy that gives expression to its policies it can’t really be called a proper coalition.
Perhaps we need that cabinet committee that was promised in 2017, among other institutions. We also need far more expertise on all sides on fiscal policy and fiscal trade-offs. That’s especially so on tax policy issues, because while politicians who have been in provincial or national government are familiar with spending issues, they’ve generally not been part of discussions on the revenue issues.
That goes to another crucial lesson of the delayed budget, which is that SA needs a far richer fiscal policy debate. The danger of the political posturing of the past couple of weeks is that could allow budget mythologies to thrive and deter serious discussion about policy options we might need in future. It may also confuse longer-term measures with short-term solutions.
Take spending. The DA has urged a review to find efficiencies and root out wasteful government programmes and entities. That is an excellent idea, one the Treasury has long supported, even if it hasn’t had the political authority or backing to implement targeted cuts of this kind.
But a proper spending review is not a quick fix. It’s not Donald Trump sending in Elon Musk and the “Doge” to slash and burn — or we certainly hope it is not. It involves a thorough process of analysis — the issues are complex, and it takes time. As it happens the expertise is already there in the Government Technical Advisory Centre, which has long conducted such reviews, but not to nearly enough effect. Perhaps the GNU can give it more authority. But it’s not a 2025/26 fiscal solution.
Likewise the mythical wealth tax, which a range of cabinet ministers apparently called for. The Davis tax committee estimated in 2018 that a wealth tax could raise R4bn-R5bn. The government could get as much just by adjusting the fuel tax for inflation, which it’s declined to do for the past three years.
There are far higher estimates, but for now the Treasury doesn’t even have data on how much wealth is potentially out there that is not being taxed. It is now collecting it. The extra cash from better compliance that SA Revenue Service commissioner Edward Kieswetter promises if he gets more budget is likewise hard to measure or budget for in 2025/26, crucial as that initiative is.
Then there is VAT itself. Even if the GNU partners make the case against it for now, it should not be off the table as a future option. There is still a strong economic case to change the structure of SA’s tax system over time to one that relies more on indirect taxes such as VAT and less on direct income taxes on individuals, whose income tax burden — particularly for middle class people — is already very high by emerging market and global standards.
Nor does SA’s VAT system weigh more on the poor than the rich as it does in many other countries — all those zero ratings of staple foods cushion the poor, as do social grants. A study of that earlier VAT increase showed exactly that. It’s the fiscal mix that matters, not a single tax instrument. And whatever mix emerges in budget 2.0, the delay has spotlighted the need for a more robust political process and a more sensible fiscal debate to get us there next time.
• Joffe is editor-at-large.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.