Finance Minister Enoch Godongwana. (Photo: Mlungisi Louw/Gallo Images)
Finance Minister Enoch Godongwana on Wednesday said the treasury had weighed every way of finding more revenue before staying on the route of a VAT increase, although a smaller one than proposed last month.
“We thoroughly examined alternatives to raising the VAT rate,” he told the National Assembly when he finally delivered his budget speech after a three-week delay.
“Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraint and rising electricity costs.”
There was also the fact that South Africa’s corporate income tax collections were already higher than that of most of its peer countries.
“On the other hand, an increase to the personal income tax rate would reduce taxpayers’ incentives to work and save.”
It was simply not feasible because South Africa’s top personal income tax rate and personal income tax collection as a percentage of the GDP was much higher than that of most developing countries, he added.
After weeks of debate within the ruling coalition, Godongwana decided to increase VAT by 0.5% in the coming financial year and the same amount the following year. It will bring the VAT rate to 16% in 2026.
The smaller increase has given the minister an additional R28 billion in revenue, half of what he had hoped to achieve with the two percentage point increase he planned to announce in February, before opposition from within the coalition, as well as the ANC, forced him to abandon the prepared budget.
The compromise will see debt stabilise not at 76.1% in the new financial year, as the minister had initially calculated, but 76.2% instead.
Minutes before Godongwana started speaking, Democratic Alliance (DA) leader John Steenhuisen made plain that the party rejected even the reduced increase and would not support the budget.
His party has argued that there was no revenue crisis, simply an inability to stop inefficient spending and provide stimulus to the economy, which had set in during three decades of ANC majority rule.
Godongwana has insisted that he needed additional funds to shore up health and education, get passenger rail running efficiently and extend the social relief of distress grant for another year, without incurring more debt.
“Taking on additional debt was also not feasible,” he told MPs on Wednesday.
“The amount was simply too large. The cost of borrowing would be unaffordable. Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades.”
He went on to acknowledge what economists and trade unionists have stated repeatedly in recent weeks: “VAT is a tax that affects everyone.”
But in a media briefing an hour before his speech, the minister suggested that the DA’s resolute opposition to any VAT increase was not simply an attempt to shield the poor but to win a political battle after losing a few on health, education and expropriation legislation within the coalition.
He told MPs the smaller increase was an attempt to cushion vulnerable sectors of the population, whereas abandoning a VAT hike altogether would leave the treasury unable to make cuts that would hurt the poor.
“By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered. The increase is also the most effective way to avoid further spending cuts and to enable us to extend the social wage.”
The minister also decided not to adjust personal income tax brackets for inflation, which he had initially planned to do. The fuel levy will remain unchanged, while so-called sin taxes will rise steeply.
The revised tax proposals will generate additional revenue of R14.5 billion in 2026-27, he said.
