Economists are pleading with finance minister Enoch Godongwana not to raise the value-added tax (VAT) when he finally delivers the 2025 Budget Speech on Wednesday.
Their concerns come after the Budget Speech, which Godongwana was scheduled to deliver in the National Assembly in Cape Town on February 19, bombed out due to disagreements over the hiking of VAT from 15% from 17%.
The DA, which is the second biggest coalition partner after the ANC in the government of national unity, opposed the tax hike, meant to raise an additional R60-billion in revenue, arguing that it “would have broken the back of the economy”.
“VAT increases have a negative effect on the overall economy and we don’t know whether at the end of the day that the damage it would do to the economic growth and -revenue collections might not outweigh the benefits of getting an additional amount of revenue from the VAT,” said Econometrix economist Azar Jammine.
“If people spend less, then even at a higher rate of VAT, the government will not collect as much as it is hoping for,” said Jammine,
He warned that the VAT increase was set to hit everyone hard.
“It basically increases the cost of living by a significant proportion.”
Godongwana is expected to unveil an infrastructure budget north of R1-trillion in 2024/2025 government financial year.
Jammine, however, said he did not have confidence in the infrastructure budget.
“The infrastructure budget has been there every year; there is nothing new,” Jammine said.
If government were for once to succeed to spend the amount of money that has been budgeted for infrastructure, the money would make an enormous difference to economic growth.”
Jammine said the infrastructure budget was not being spent fully because municipalities were generally run by incompetent officials while the construction and water mafias were disrupting the delivery of state projects.
Economist Duma Gqubule said both the VAT increase and government spending cuts were bad for economic growth.
“South Africa’s economy has barely grown for 16 years. To get ourselves out of this situation, we have to make sure that we (both government and consumers) are spending money in the economy.”
Gqubule also proposed that National Treasury, instead of increasing the VAT, should tap into surpluses from the Unemployment Insurance Fund and Government Employees Pension Fund (GEPF).
“There are pension funds that have accumulated surpluses of R645-billion in the 12 years until 2024 and the funding is R400-billion more than the target that was set by the trustees.
“This means South Africa can do with a tax holiday (if we tapped on them),” said Gqubule.
“Government can also consider cutting the assets of the GEPF by half. The PIC assets are sitting at R3-trillion, Unemployment Insurance Fund has a R140-billion surplus.
“Government can write the R800-billion debt, which is owed by government and state owned entities to the PIC because this is debt that government owes to itself and the debt to income ratio will come down,” he said.
He stated that government should withdraw additional funds from the Reserve Bank’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA).
In order to lower government borrowing and debt servicing costs, the government agreed to withdraw R150-billion from the GFECRA between 2024–2025 and 2026–2027, with R100-billion in 2024/2025, R25-billion in 2025/2026, and R25-billion in 2026/2027, according to a National Treasury announcement last year.
