South Africa’s Revised Budget Proposes Smaller VAT Hike Amid…

South Africa’s National Treasury proposed a smaller VAT hike to address coalition government disputes, suggesting a 0.5 percentage-point increase. The Democratic Alliance remains opposed, complicating budget approval. The adjustments aim to secure funding for essential services while managing rising public debt and inflation concerns.

On March 12, 2023, South Africa’s National Treasury presented a revised budget proposing a smaller increase in value-added tax (VAT) in an attempt to overcome a coalition government deadlock. Initially, a 2-percentage-point VAT hike was proposed, but support was withdrawn by the African National Congress’ (ANC) main coalition partner, necessitating a budget postponement. The latest proposal entails a 0.5 percentage-point increase in VAT from the current rate of 15%, starting on May 1, followed by an additional increase in 2026.

Finance Minister Enoch Godongwana announced the budget amid opposition from the Democratic Alliance (DA), the government’s second-largest party. John Steenhuisen, leader of the DA, emphasized their stance stating, “The DA will not support the budget in its current form,” expressing that their party is opposed to the VAT increase.

The budget remains the most significant challenge for the coalition government, which formed after the ANC lost its parliamentary majority in 2021. To pass the budget, the ANC requires support from at least one additional major party, while other outside parties, such as the Economic Freedom Fighters, oppose any tax increases. Despite their ideological differences, the ANC and DA have managed coalition governance amidst minor disputes.

The Treasury addressed ongoing “new and persistent” spending pressures necessitating additional funding for essential sectors like health, education, and rail infrastructure. Godongwana explained that this tax hike was critically evaluated against other options, concluding that it was the optimal solution to prevent further cuts in public spending.

The current budget adjustments anticipate generating 28 billion rand ($1.53 billion) in revenue for the fiscal year commencing April 1, 2025, a reduction from the original expectation of 58 billion rand. Additionally, the budget acknowledges an increased budget deficit of 5.0% of GDP for the 2025/26 fiscal year and projected national debt to peak at 76.2% of GDP. As a consequence of the VAT increase, consumer inflation is also expected to rise.

In conclusion, South Africa’s National Treasury proposed a reduced VAT increase to navigate internal coalition conflicts while addressing pressing fiscal needs. The opposition from key coalition partners like the DA puts the budget’s approval in jeopardy. The adjustments to the budget signify critical funding necessities aimed at public service sectors, emphasizing the ongoing challenges posed by public debt and inflation.

Original Source: www.cnbcafrica.com