Graphic: (Created by Neesa Moodley using Jupiter AI)
On Wednesday, 19 February, Treasury was to propose a 2% VAT increase, leading to the postponement of the national Budget.
On Thursday, 6 March, Thuli Madonsela, director of the Centre for Social Justice at Stellenbosch University, along with Neil Coleman and Gilad Isaacs from the Institute For Economic Justice (IEJ), unpacked the impact on hunger, poverty and inequality that a VAT increase or cut to social services would have.
Coleman, co-founder and senior policy specialist at the IEJ, said the intervention was unnecessary because a small shortfall needed to be funded (1% of the budget) which is about R32-billion, excluding the R35-billion SRD grant allocation that had already been budgeted for as part of the 2025 Budget allocation.
Despite claims of the VAT increase being efficient, Coleman argued that Treasury’s own evidence from the 2018 increase is that it is ineffective.
Constitutional commitments
“As it stands at the moment, the fruits of the Constitution are at odds with its promise, primarily regarding substantive equality and broader social justice,” Madonsela said.
“Our Constitution requires equality. So substantive equality, you treat people differently when their circumstances are differentiated. For example, our income tax is based on substantive equality.”
Read more: What a 2 percentage point VAT increase would actually cost SA households
Madonsela said their studies on the compensation strategy of zero-rated items had found that the slight mitigation does not take away from the regressive impact of a VAT increase.
A VAT increase was “anathema to the transformative constitutionalism and transformative governance ethos of the Constitution. So, going forward, a VAT increase will have a regulatory impact that is negative on hunger, poverty and inequality.”
Graphic: (Created by Neesa Moodley using Jupiter AI)
Alternatives
IEJ executive director Isaacs said there are two pathways out of the immediate crisis: cutting expenditure or mobilising more resources.
Cut expenditure:
- Across the board “lawnmower cuts” led to widespread dysfunctional services since no department has been able to deliver on its mandate, said Isaacs;
- Targeted but deep cuts: The difficulty here is that it’s unclear what can be cut without significantly affecting a particular service, he said;
- Postponement of some expenses, such as South African National Roads Agency debt repayment;
- Government consolidation: There is room for department rationalisation where departments are merged or become programmes. Isaacs said this would not get Treasury more than R20-billion over the medium term; and
- Spending review: Consultative and transparent spending review process to identify where cuts could be “safely” made and savings invested in areas of shortages. This should not adopt an austerity view, he said.
Raise borrowing:
This is acceptable, but highly unlikely, said Isaacs. The country would need to pursue sources of financing that can be accessed more cheaply.
Use existing pathways more effectively:
- Rely on growth to expand the economy with the existing suite of revenue-raising mechanisms, Isaacs said. This won’t be immediate and can’t be solely relied on;
- More effectively collect existing taxation: This is one of the preferred interventions because it pays for itself, he said. The SARS commissioner has said more than R800-billion is lost due to unpaid tax debts, overdue tax returns and uncollected tax inventory; and
- Active support for the UN Tax Convention (as a long-term approach) aims to move away from the Global North-dominated system of double taxation agreements, which disproportionately favour residence-based rather than source-based taxation, to the detriment of developing countries, said Isaacs.
Remove tax breaks:
Raising revenue through a reduction in tax rebates is a preferred option because it is easy to implement, is targeted and least likely to have distortionary impacts, said Isaacs. For example, he recommended the removal of tax breaks linked to pension contributions, especially for high-earning individuals (more than R750,000 per annum). In 2022/23 these deprived the public of R82.6-billion.
Additional revenue:
- Tax adjustments: There is no evidence that a 27% corporate income tax (CIT) rate has had any positive impact on investment, and has cost the fiscus, he said. South Africa could revise the CIT rate back to 28%, which has cost the country upwards of R15-billion annually, he said;
- New taxes: Implementing a social security tax has the potential to raise R64-billion, Isaacs said. South Africa could implement a net wealth tax which could raise R70-billion to R160-billion annually, taxing wealth effectively.
Leverage state balance sheet:
- Draw down on special funds: The Gold and Foreign Exchange Contingency Reserve Account could be tapped again, Isaacs said. It currently holds R300-billion; and
- Tap existing pools in a thoughtful manner, such as a UIF surplus for public employment schemes.
“On the very important question of the SRD grant, Treasury indicated that there was going to be no increase, which goes completely against the high court ruling, but also against the reality that that grant has fallen way behind inflation, and at the very least it should be increased by a similar level as the other social grants,” Coleman said.
“Stats SA has just released a report a couple of days ago which shows that hunger is continuing to increase and that this is a national crisis.” DM