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The economics and politics of the VAT hike
JOHANNESBURG, SOUTH AFRICA
FINANCE Minister Enoch Godongwana has stated that he sees no alternative to the upcoming Value Added Tax (VAT) hike. He argued in court papers filed last Wednesday that failing to implement the VAT increase on the 1st of next month would compel the government to resort to borrowing, thereby exacerbating the cost of public debt.
Godongwana’s comments signal the African National Congress’s (ANC) firm commitment to the VAT increase, which it deems essential.
Businesses are already bracing for the change, while the Democratic Alliance (DA) has taken legal action to challenge the VAT increase. However, the DA’s chances of halting the VAT hike implementation seem slim in my opinion. That said, their opposition to the hike is commendable. It’s a strategic public relations move in a crowded coalition government.
According to Bloomberg News, Godongwana contended that the DA’s objections lack legal merit, as the party initially supported the VAT increase during cabinet discussions.
In its latest Monetary Policy Review, the South African Reserve Bank (SARB),noted that the 0.5% VAT increase this year and next could add 0.2% to headline inflation yearly. This would further strain South Africans already grappling with a high cost of living.
South Africa remains one of the most heavily taxed emerging economies, with a personal income tax rate of 45%. Citizens are taxed on numerous goods and services, yet they endure failing infrastructure, ineffective policing, and poor educational outcomes. Taxpayers feel shortchanged, receiving little in return for their tax contributions.
It remains uncertain whether the SARB will cut interest rates further this year, given global risks such as trade wars. SARB Chairman Lesetja Kganyago addressed these concerns during his presentation of the Monetary Policy Review in Johannesburg last week. While the SARB reduced interest rates by 25 basis points last September, 25 basis points in November, and 25 basis points in January, global inflation risks may prompt caution in 2025. Nedbank economists have said that the SARB is likely to keep the interest rates on hold – at 7.5% – in 2025 due to the global trade war.
The VAT hike comes at a challenging time for South Africa’s economy, which has been stagnant for the past 15 years. Economist Dawie Roodt recently told BusinessTech that the country’s fiscal situation is dire, with the government spending billions on unproductive things. He revealed that 65% of government expenditure goes toward debt servicing, salaries, and social grants—a shocking statistic.
The politics of the VAT hike
On the politics of VAT, all parties in the Government of National Unity (GNU) must share responsibility. Coalition members cannot simultaneously govern and act as opposition. This inconsistency is often used to excuse the shortcomings of non-ANC parties within the coalition.
Some argue that the DA should remain in the GNU despite its inability to influence policy, claiming the alternative would be worse. However, this perspective is debatable, as the current coalition government is already underperforming.
By principle, all GNU members should be held accountable for the VAT increase. No party should be exempt from scrutiny, as they are collectively part of the government.
South Africa’s priorities, both before and under the GNU, have been misguided. Policymakers favor redistribution over production, relying on higher taxes to fund inefficient programs. The VAT increase exemplifies this flawed approach, burdening taxpayers further to sustain government inefficiencies.
I’m often struck by the belief that South Africa’s government policies are pro-black. This notion is deeply misguided. The VAT hike is, in fact, anti-black. The hardest hit will be black South Africans, many of whom occupy the lowest rungs of the economy. They will bear the brunt of the VAT increase, either directly or indirectly, from the limited resources they have. This exacerbates inequality, leaving the poor in a disadvantaged position where creating wealth becomes even more challenging as the cost of living rises.
If the true goal is to improve the economic well-being of South Africa’s poor, the focus should shift to reducing taxes and cutting government spending to stimulate economic growth.
In a recent interview with BusinessTech, political economist and author, Moeletsi, Mbeki, emphasized that shrinking the bloated government will help in revitalizing South Africa’s economy. He also argued for the abolition of BEE (Black Economic Empowerment) as a necessary step to address the country’s economic stagnation.
Mbeki’s insights are spot on. These are the measures required to reboot South Africa’s economy—not VAT hikes in an environment where annual economic growth struggles to reach even 1%. PM
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© PHUMLANI M. MAJOZI