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JEREMY MAGGS: Yesterday’s budget drama has unfolded, mainly due to a disagreement over the proposal to increase the value-added tax [VAT]. Let’s explore this issue. South Africa is facing serious economic difficulties, characterized by rising debt, sluggish growth, and a tightening fiscal landscape. Reports indicate that the government was considering raising VAT to 17% as a means to tackle the budget deficit.
Read: The VAT that shattered the budget
Proponents argue that this is the fastest and most effective way to generate revenue without placing additional burdens on an already stressed tax base. On the other hand, critics warn that such an increase could disproportionately affect the most vulnerable citizens and stifle economic activity.
Let’s break down this discourse. Joining us is Professor Andre Roux, an economist from the Stellenbosch Business School. Andre, it’s always a pleasure to chat with you. Do you think raising VAT to 17% would have been a prudent economic move?
ANDRE ROUX: Jeremy, economics is all about trade-offs, and both sides can make convincing arguments. However, it’s crucial to look at the bigger picture. Upon reviewing the first half of the budget speech, it was generally coherent, clearly emphasizing the urgent need to curb the growth of government debt – a fact that is widely accepted.
There’s also a recognized necessity to stimulate the economy through infrastructure investments. I have no objections to that. The growth forecasts, while not excessively ambitious, at least appear realistic.
Read: The undelivered budget …
That said, we then transition to discussions about revenue and tax proposals. The speaker appropriately highlights the difficulty of balancing fiscal demands, suggesting three potential paths: cut spending, incur more debt—which is not advisable—or implement strategic tax adjustments. His subsequent assertion claimed, “After thorough analysis of the trade-offs, we have chosen the most responsible route forward.”
One would hope this would result in cutting unnecessary government expenditures, but unfortunately, that was not the case. Instead, he went on to propose, “To raise the VAT rate by two percentage points.” The justification was even more troubling: “A necessary step that will allow us to fund public sector wage increases for civil servants.”
This framing feels rather offensive. It essentially implies that taxpayers will bear a heavier tax burden predominantly to support wage hikes for civil servants.
This is where the core issue lies. A more prudent strategy would involve forgoing significant tax increases altogether. We typically observe hikes in sin taxes, which are expected. However, a stronger emphasis should have been on reducing government spending.
Granted, options are limited. Politically, cutting civil servant salaries seems almost unthinkable, while social grants are essential and generally off-limits. Reductions in funding for health or education are also not on the table, but surely there are other avenues for cost savings, particularly in terms of eliminating wasteful and unauthorized expenditures.
Read: Revenue collections driven by consumption and two-pot withdrawals
Mr. Edward Kieswetter, the commissioner of Sars, recently remarked that any tax hike would be unwelcome. He pointed out that hundreds of billions of rand remain uncollected due to various systemic issues. By addressing these challenges, we could organically raise a significant amount to help close the gap. Therefore, it’s a question of timing and context.
JEREMY MAGGS: Did you perceive this as politically misguided, particularly since VAT is often regarded as a regressive tax that disproportionately impacts low-income families?
ANDRE ROUX: Yes, absolutely. He later mentions that raising personal income tax would be ill-advised at this point since the existing tax base is already heavily burdened. An increase in corporate tax rates would also be harmful as it could deter investment, which we are trying to attract.
Read: DA warns tax-hike plan would have ‘broken’ economy
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Thus, it becomes a matter of elimination. Nevertheless, you’re right that VAT is commonly viewed as a regressive tax that disproportionately affects those with lower incomes. In his initial budget speech, he tried to reassure the public by stating that vulnerable households would be protected through an expanded list of VAT zero-rated items, including canned vegetables, dairy substitutes, and various meat products.
He also mentioned offering additional relief for fuel levies, not increasing them, as well as plans to raise social grants above the inflation rate while adjusting income tax brackets to prevent fiscal drag on both the poor and the more affluent.
From their perspective, raising the VAT rate seemed to involve some sort of quid pro quo. However, while VAT is often regarded as a fair tax because it applies to everyone, in this context, it feels much less equitable. So, to answer your question, I don’t believe the strategy was as carefully planned as it ought to have been.
JEREMY MAGGS: If this proposal had proceeded, what effect would a VAT increase have on inflation?
ANDRE ROUX: Given that a large share of goods and services included in the inflation basket are subject to VAT, it would naturally lead to an uptick in inflation, not just by 2% but potentially by a notable amount, perhaps around 0.5%. I haven’t calculated the exact figures. Ultimately, it would lead to a higher inflation rate.
One could contend that since inflation is relatively low at the moment, a few extra percentage points may not appear to be a big deal. However, those are hollow reassurances for the millions currently experiencing a severe cost-of-living crisis.
Moreover, with our present weak economic growth, such an increase might further suppress consumer demand, potentially leading to lower-than-anticipated revenue gains in the long term.
ANDRE ROUX: It indeed creates a vicious cycle. If the economy is only growing at 1.5% this year, having experienced even less in previous years, that translates to sluggish growth in the tax base. This is a crucial issue; we cannot surge forward relying on a growing tax base to generate additional revenue.
Read: What lacking a national budget means for SA and tax collections
If the economy were instead expanding at 3% or 4%, many challenges, including the organic growth of tax revenue, would be mitigated without needing to change tax rates. Additionally, a robust GDP growth rate would assist in managing the concerning levels of government debt relative to GDP, meaning as GDP increases, debt management also becomes more feasible.
Read:
SA budget unraveled after a key detail was kept secret
SA can ‘ill afford’ budget uncertainty – Busa
JEREMY MAGGS: Thank you for your thoughtful analysis. We appreciate your contributions, Professor Andre Roux from the Stellenbosch Business School.
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