The theatrics that led to the postponement of this week’s budget speech have killed any chance of VAT changes being included in the budget due for retabling on March 12, meaning the GNU may have to consider huge spending cuts to balance the books.
Political parties represented in the GNU and economists are in agreement that the rejection of the two-percentage-point hike in VAT means a range of haircuts will have to be introduced to make up for the R58bn revenue shortfall, which threatens government spending on education, health, policing and other critical functions.
The DA, which vociferously rejected the VAT increase in a cabinet meeting on Wednesday ahead of finance minister Enoch Godongwana’s aborted budget speech has proposed a “pro-growth” budget that prioritises spending cuts.
We hope we will now have a pro-growth budget with no tax increases. The DA will not support a hike in taxes.
— Willie Aucamp, DA spokesperson
“We hope we will now have a pro-growth budget with cost cuts and no tax increases. The DA will not support a hike in taxes,” said party spokesperson Willie Aucamp.
Instead of raising taxes or seeking fresh debt, the government should consider cost-cutting, enhancing spending efficiencies, and adding capacity for the South African Revenue Service to collect more from tax dodgers.
“There are overlapping departments where cost-cutting can take place. Efficiency is not the order of the day. The Sars commissioner even said there was no need to hike taxes but rather boost Sars' capacity.”
He said the DA “definitely” wanted no more borrowing by the fiscus as the country needed to rein in debt which is set to peak at 76.1% of GDP.
“We cannot borrow ourselves into prosperity. We will not support additional borrowing.”
Uncertainty added
Efficient Group economist Dawie Roodt said the postponement was a “very serious” development as it added uncertainty regarding the government’s appetite to borrow, cut spending or tax elsewhere. On the other hand, he said, it was an opportunity to “cut state funding down to size”.
“There is absolutely no way they are going to touch VAT. In fact, other taxes like company taxes and personal income taxes, have been maxed out ... the only option is to grow the economy and cut back on state spending.”
But Roodt suspects the government is likely to find a way to borrow more money as spending cuts and tax hikes have become politically difficult. He said if the revised budget is rejected in March, government departments can still spend from last year’s allocations, but a solution would have to be found in subsequent months.
Independent economist Duma Gqubule called on the finance minister to step down after the budget debacle, as “there is a cancer in the National Treasury that must be lanced”.
“We don’t want a compromise, that is a 1% VAT increase, we want a credible growth budget and no VAT increase.”
Former finance minister Malusi Gigaba raised VAT from 14% to 15% in 2018, but this did not raise the revenue that the government had hoped for, Gqubule pointed out. However, he firmly believes the government has the appetite to take on more debt to fund growth-intensive programmes.
“What happened to evidence-based economic policy? The fear-mongering on debt ... if you address the underlying problem, then you don’t need to raise taxes. We don’t have a debt problem; we have a GDP growth problem.
“We have a president who believes that he is incompetent to decide on economic policy, so he defers to the Treasury. This is when we need real leadership because we cannot defer every matter to the Treasury. To hell with market sensitivity, we must have frank conversations about our budget, whether the market likes it or not,” said Gqubule.
Embarrassment for the country
KPMG lead economist Frank Blackmore said while the postponement was not ideal, it would force co-operation on the GNU parties regarding budget priorities.
“Besides the embarrassment for the country, it could result in a better budget for the people and the economy. I think, therefore, if you look at the reaction of the market, it has been short-lived, instantaneous, and has started to unwind.”
There’s a polarised view of the tax. We see tax as divorced from expenditure. In most democracies, tax is not a revenue tool; it’s a social tool. People give the government taxes to get certain social outcomes.
— Frank Blackmore, KPMG lead economist
“There’s a polarised view of the tax. We see tax as divorced from expenditure. In most democracies, tax is not a revenue tool; it’s a social tool. People give the government taxes to get certain social outcomes,” said Blackmore.
Leon Marais, an independent trade compliance adviser, warned it was going to be difficult to administer the expanded basket of VAT-exempted goods the Treasury is planning, including meat (mutton, chicken and goat) and canned foods.
“VAT was implemented as an option to general sales tax in 1989 because GST was unviable and it became a nightmare to administer the many exemptions. Now, more are planned. That’s going to be difficult to administer,” Marais said.
University of Johannesburg professor of sociology Patrick Bond said the finance minister suffered a setback but has a chance to argue for a lower VAT hike in March. He warned, however, that this could make the GNU vulnerable.
“If Godongwana holds on after this historic defeat, he may gain a 1% compromise increase from the faux-populist DA, but this will fuel discontent and drive the main left factions much closer than they’ve ever been, as we saw in Wednesday’s all-in march against austerity.”
He said the Left preferred resolving revenue shortfalls through the imposition of a wealth tax and raising corporate tax given that spending cuts had failed to incentivise private sector investment.
Common sense alternatives
Cosatu spokesperson Matthew Parks welcomed the postponement of the budget, calling the VAT hike proposal “regressive”.
“Cosatu tabled several common sense alternatives to a VAT hike to ensure the state has the resources it needs to fund public and municipal services, stimulate the economy and slash unemployment.
“These include providing Sars with an immediate additional R3bn to boost tax compliance from 64% to 67%, thus generating the R60bn needed.”
He called for engagements with public and private financial institutions to finance infrastructure development, boost small businesses and exports, and intensify industrialisation to create more jobs. “Ill-considered shortcuts” must end, Parks said.
Southern Africa Tourism Services Association CEO David Frost said a VAT hike would erode SA’s competitiveness as a tourism destination as travellers were cost-conscious when comparing destinations.
“A two-percentage-point hike would seriously undermine our tourism advantage at a time when price sensitivity is at an all-time high. The global middle-class traveller represents one of our biggest growth opportunities.”
Godongwana told reporters shortly after the postponement of the budget speech that while the first VAT hike proposal since 2018/19 was contentious, SA’s gross loan debt at 76.1% of GDP gave the fiscus limited options.
“How do we fund the challenges and priorities? Do we borrow more? Do we continue cutting expenditure? Do we raise tax? What are the implications of that?”
Treasury director-general Duncan Pieterse said if a budget was not approved, the government has provisions to allow it to spend up to 45% of last year’s appropriation in the first four months.
Leon Marais, an independent trade compliance adviser, warned it was going to be difficult to administer the expanded basket of VAT-exempted goods the Treasury is planning, including meat (mutton, chicken and goat) and canned foods.
“VAT was implemented as an option to general sales tax in 1989 because GST was unviable and it became a nightmare to administer the many exemptions. Now, more are planned. That’s going to be difficult to administer,” Marais said.
University of Johannesburg professor of sociology Patrick Bond said the finance minister suffered a setback but has a chance to argue for a lower VAT hike in March. He warned, however, that this could make the GNU vulnerable.
“If Godongwana holds on after this historic defeat, he may gain a 1% compromise increase from the faux-populist DA, but this will fuel discontent and drive the main left factions much closer than they’ve ever been, as we saw in Wednesday’s all-in march against austerity.”
He said the Left preferred resolving revenue shortfalls through the imposition of a wealth tax and raising corporate tax given that spending cuts had failed to incentivise private sector investment.
Common-sense alternatives
Cosatu spokesperson Matthew Parks welcomed the postponement of the budget, calling the VAT hike proposal “regressive”.
“Cosatu tabled several common sense alternatives to a VAT hike to ensure the state has the resources it needs to fund public and municipal services, stimulate the economy and slash unemployment. These include providing Sars with an immediate additional R3bn to boost tax compliance from 64% to 67%, thus generating the R60bn needed,” he said.
He called for engagements with public and private financial institutions to finance infrastructure development, boost small businesses and exports, and intensify industrialisation to create more jobs. “Ill-considered shortcuts” must end, Parks said.
Southern Africa Tourism Services Association CEO David Frost said a VAT hike would erode SA’s competitiveness as a tourism destination as travellers were cost-conscious when comparing destinations.
“A two-percentage-point hike would seriously undermine our tourism advantage at a time when price sensitivity is at an all-time high. The global middle-class traveller represents one of our biggest growth opportunities.”
Godongwana told reporters shortly after the postponement of the budget speech that while the first VAT hike proposal since 2018/19 was contentious, SA’s gross loan debt at 76.1% of GDP gave the fiscus limited options.
“How do we fund the challenges and priorities? Do we borrow more? Do we continue cutting expenditure? Do we raise tax? What are the implications of that?”
Treasury director-general Duncan Pieterse said if a budget was not approved, the government has provisions to allow it to spend up to 45% of last year’s appropriation in the first four months.
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