The parliamentary budget office (PBO) has urged MPs make protecting the poor from the VAT hikes a priority, because the attempts to do so in the budget document might not be sufficient.
PBO head Dumisani Jantjies said while the Treasury had committed to shielding vulnerable households from the two 0.5 percentage point increases, the measures it has announced, such as expanding the zero-rated food basket, may not be enough to mitigate the broader inflationary effects.
“The Competition Commission’s 2024 ‘Essential food pricing monitoring report’ indicated that retail prices of essential foods remained persistently high despite lower producer costs and fuel prices. This suggests that retailers undermine protective measures by not passing savings to consumers,” Jantjies said.
The PBO studied the budget’s proposals and found that the proposed relief for poor households should be prioritised as the VAT hike would put these households under considerable pressure.
“We did extrapolate that quite specifically, and it showed that 30% of VAT comes from low-income households … If parliament’s houses or committees debate this fiscal framework, let’s make sure that the division of revenue and appropriations bills deliver on that mechanism of support to relieve the pressure on society.”
You can remove VAT from brown bread, the retailer just keeps the price as is and pockets the difference. That’s the difficulty
— Matthew Parks, Cosatu
Apart from extending zero-VAT ratings to more food items, Finance minister Enoch Godongwana also proposed above-inflation social grant increases and freezing the fuel levy as ways of protecting the poor.
New food items that will be zero-rated include offal, other meat products such as sheep heads, dairy liquid blend and some canned goods. According to a PwC analysis, the additional zero-rated food items, plus the freeze on the fuel levy, will put R6bn back in the pockets of consumers.
Cosatu parliamentary liaison officer Matthew Parks said there was no guarantee that retailers would not raise the price of these items despite their zero rating.
“You’ve got no capacity as a state to enforce it. You can remove VAT from brown bread, [but] the retailer just keeps the price as is and pockets the difference. That’s the difficulty.”
He said the labour federation had suggested increasing the allocation of free electricity and water to registered indigent households, and the provision of some goods such as sanitary pads free of charge to schools, universities and hospitals.
Disproportionate burden
The major food retailers Shoprite, Pick n Pay and Spar had not responded to questions at the time of going to print. Pepkor declined to comment.
PBO economic analyst Kagiso Mamabolo told parliament’s select committee on appropriations that the VAT hike would disproportionately burden middle- and low-income earners, who typically devoted more than 68% of their income to essentials such as food, water, electricity and housing.
“The argument that South Africa’s VAT rate is low relative to peer countries ignores the extreme wealth and income inequality present within the country. In South Africa, the bottom 50% of the population holds negative wealth, while the top 10% owns over 85% of the total wealth.
“By contrast, the wealth and income distribution in these peer countries is less concentrated in the hands of the top 10%. As a result, the populations in most of these countries are less exposed to the regressive impacts of higher indirect taxes because their wealth and income are distributed relatively more equitably,” she said.
Court challenge
The VAT increase tabled in March sparked the worst crisis yet in the government of national unity following its rejection by the DA, which has gone to court to try to block it. The fate of the GNU was still in the balance late this week.
The EFF has also challenged the passage of the fiscal framework and revenue proposals in court. ActionSA agreed to support the budget but said later it had done so on condition that the VAT hike was cancelled and revenue was found elsewhere.
While admitting that the VAT hike was a “blunt instrument”, Godongwana told parliament that his budget sought to raise revenues to increase spending on service delivery to the poorest households.
He said the VAT hike proposal sought to raise R15.5bn, paid mostly by the three upper-income categories, with the remainder being paid by lower income categories.
“We are talking about zero grading, which is R2bn. We are talking about an increase in the indigent basket. We are talking about this R29bn in education. We are talking about this R28bn in health. Let’s be fair when we talk about help for these communities. Let’s talk about numbers.”
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