Government has lost the plot

Trade union Solidarity says that a reported proposal by National Treasury to hike VAT by 2% to pay for social grants is crazy.

The speculated VAT hike is reportedly one of several proposals put forward by the Treasury at high-level meetings with other government officials this month, as it seeks to find ways to boost revenue to pay for the state’s expanding social spending needs amid a widening budget deficit.

According to an assessment of government finances by economists at Nedbank, South Africa is looking at a massive budget deficit of around R280 billion in 2023/24 – with Absa warning that this could stretch as far as R300 billion by the end of the financial year.

Disturbingly, over the first four months of 2023/24 alone, the budget shortfall totalled R191.1 billion, equivalent to 67.4% of the consolidated budget deficit estimated for the fiscal year.

South Africa’s budget is being hit from both sides.

Revenues are down, with corporate tax collections dropping sharply in the first four months of 2023/24, dragging total tax revenue on income and profits, while subdued VAT growth contained revenue from goods and services.

Expenditure is also up, with the higher-than-budget public sector wage settlement becoming the major drag on the fiscal position, as it raises total spending significantly above budget, while the higher debt service costs are also adding to the pressure.

Finance minister Enoch Godongwana has long warned of the consequences and trade-offs needed if the government did not stick to the February budget, but these warnings were largely ignored.

Even with money tight, politicians are talking up expanding spending even further – all while shooting down the measures needed to keep things under control.

According to Solidarity, the VAT hikes in particular, have been put forward as a way to ensure the continued payment of the R350 social emergency grant amid the public financial crisis.

Reports have indicated that increasing VAT will bring in an additional R24.5 billion or R49.4 billion, depending on the percentage increase decided upon.

This year’s National Budget showed that the payment of the R350 grant costs R44 billion per year.

Using this metric, a VAT hike to 17% should be enough to cover the payment of the grant, which is being pushed by the government as a new form of basic income for some 8.5 million people in the country.

However, Solidarity warned that the reality of the move would be far from the expected result and would ultimately prove counter-intuitive.

“If such a step is decided upon, it will unnecessarily put already vulnerable households in South Africa under even greater pressure,” it said.

The core problem lies in the last VAT hike seen in South Africa.

“The outcome of the previous VAT increase in 2018 was that it had produced only about half the Treasury’s expected revenue from VAT – a clear indication that South Africans are already being overtaxed,” Solidarity said.

“The previous increase in VAT did not yield the expected return, and there is no reason to believe that any further increases will have a different outcome,” it said.

Adding to this, any attempts to further increase taxes will push households into crisis and would be akin to the Treasury “trying to get blood from a stone”, the union said.

Only option

Solidarity said that the only solution to the growing budget deficit has to be found on the expenditure side.

“The state urgently needs to rein in its spending and relinquish more of its tasks to the private sector. The government must realise that it simply has no more money to pursue pipe dreams such as the NHI and all sorts of other nonsensical ideas,” it said.

The government should instead focus on “urgent economic growth”, cutting red tape and obstacles for businesses and the private sector, and resolve the energy crisis.

“Threatening” taxpayers with even more taxes is not the way to go, it said.

“Disposable income is the decisive factor to achieve this, and a tax increase will put this under even more pressure.”

Read: We were warned