After arguing relentlessly that South Africa’s fiscal predicament desperately required a VAT increase, the ANC has blinked. The reasons it did so are simple and complicated, economists say.
The simple reason the ANC caved is because it did not have the votes to push through even a much-diminished VAT increase.
With the DA, Freedom Front Plus, EFF and MK Party all against it, and even its new allies outside the government of national unity – Herman Mashaba’s ActionSA and Mmusi Maimane’s Build One South Africa – emphatic they would not support even a 50 basis point (bp) increase, the ANC had painted itself into a corner.
In theory, it could have pushed harder, thrown down the gauntlet and stuck to its guns, but that route in the current unsettled global situation would have been extremely risky.
The less obvious reason the ANC caved was simply mathematical: having backed away from a 200bp to a 50bp hike, the increase in income was likely only R13bn, which is a long way off the R60bn government was hoping to raise with the original 200bp increase.
Even that R13bn estimate was probably optimistic, according to Dawie Roodt, chief economist of the Efficient Group, because it probably didn’t put enough emphasis on the second-round effects of an increase in VAT. Second round effects are the knock-on results of changes is consumer expectations and business confidence. Roodt estimates the actual income increase to probably end up at R10bn.
After having made this concession, conceding this smaller increase entirely would anyway constitute only a reduction of 0.7% in the entire R2-trillion in government expenditure in finance minister Enoch Godongwana’s second budget presentation, NWU Business School economist professor Raymond Parsons points out in an interview.
The third reason is simply that tax revenue came in stronger than expected. Roodt says that at the start of April, the South African Revenue Service (Sars) announced it had collected about R9bn more than expected in the previous financial year.
In a statement on April 1, Sars put its preliminary collection outcome for the fiscal year to end-March 2025 at a net amount of R1.855-trillion. That is about R8.8bn higher than the revised estimate, and R114bn more than last year’s record haul of R1.741-trillion.
‘The right decision’
The fourth reason the ANC caved is that the DA’s court case, even though it’s been much maligned, was in fact more substantial than the “running to the courts” representation other opposition parties characterised it as. This became more obvious when the EFF joined the action, underlining the argument that this was not necessarily a partisan issue.
The DA and the EFF were intending to argue the case on a procedural basis, but in addition they aimed to show that the finance minister’s authority under section 7(4) of the VAT Act unconstitutionally permits the executive to raise taxes without parliamentary approval.
The argument of the DA and the EFF was essentially that the VAT Act allows the minister to legislate by announcement. If the courts found in favour of the DA and the EFF, the effect might have been that all tax increases would have to come to parliament before being presented in the budget speech.
If the court agreed on this point, the political process involved in increasing tax would have become very difficult – and may still. With a whole range of policies that require expenditure increases, this was presumably a possibility the ANC wanted to avoid.
The fifth reason the ANC caved is simply that there was political opposition to the VAT increase from outside of government, as well as within the party too. The extent of this opposition is not clear, but former and current ANC-supporting trade unions were vocal in their opposition to the increase.
Government-supporting trade union federation Cosatu on Thursday applauded Godongwana’s announcement that government will scrap the proposed VAT hike. “This will provide relief to millions of workers who have been struggling to cope with the rising costs of living,” it said.
The South African Federation of Trade Unions, meanwhile, called the scrapping of the VAT hike a “monumental victory”.
Parsons says the decision not to increase VAT on May 1 is “the right one” in the current circumstances. “After an intensive debate a rise in VAT was eventually seen as unnecessary, and economically and politically it also failed to command wide support,” he says.
“However, this does not mean that fiscally South Africa is out of the woods. Future risks to fiscal policy remain. Successfully managing these now depends on a credible fiscal strategy ‘to balance the books’ being embodied in the third budget to be presented shortly by the National Treasury.”
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