Scrapping the VAT increase will slightly affect inflation, but government will have to find the money elsewhere to balance the budget.
Economists have welcomed the scrapping of the VAT increase but also warn about the fiscal implications.
Frank Blackmore, lead economist at KPMG, says scrapping the VAT increase means that the economy is spared a general increase in prices due to the VAT increase.
“This means consumers will have marginally more money or disposable income to spend as they choose, which is a good thing given the cost-of-living pressures largely due to sub-optimal service delivery and price pressures from regulated prices are already a reality for most South Africans.”
However, he points out that it also means that the estimated revenue of between R10 billion to R13.5 billion, depending on whether zero-rated items are considered or not, would now not be collected requiring cuts in expenditure elsewhere in the budget to make up for it.
“Hopefully, these expenditure cuts can be made to non-critical service delivery areas, such as public sector marketing, catering, travel and personal protection budgets, as well as reviewing the size of cabinet as opposed to public services such as health, education, safety and security.”
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Reversal of VAT increase shows GNU works
Maarten Ackerman, chief economist at Citadel says the good news about the reversing of the VAT increase is that it first of all shows that the Government of National Unity (GNU) survived this kind of gridlock.
“I think it is very important for South Africa that we could achieve that. It will probably make the GNU stronger going forward in terms of working together to find solutions for the country’s money problems.”
With the VAT increase out of the equation, what about inflation?
Ackerman says it will be slightly positive for inflation, but even before the VAT increase was scrapped, the inflation data came out this week at 2.7%, screaming for a rate cut from the Reserve Bank.
Farzana Botha, senior communications manager at Sanlam Risk and Savings, says Sanlam welcomes government’s decision to withdraw the VAT increase and recognise it as a timely relief for consumers amid ongoing economic challenges.
“Maintaining the VAT rate at 15% helps preserve household purchasing power, especially for lower- and middle-income families who are most affected by cost-of-living pressures.
This move supports consumer confidence and spending, which are vital for economic recovery and growth.
“However, we acknowledge the fiscal implications of this decision, including the anticipated revenue shortfall of approximately R75 billion over the medium term.
It is crucial for the government to implement prudent expenditure adjustments to maintain fiscal stability.”
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Decision to scrap VAT increase was the right one under circumstances
Prof Raymond Parsons, economist at the NWU Business School, says the decision not to increase VAT on 1 May is the right one in the current circumstances.
“After an intensive debate, an increase in VAT was eventually seen as unnecessary and economically and politically it also failed to command wide support.
“An unchanged VAT rate brings welcome relief and certainty to business and consumers and to that extent it is confidence-building. However, this does not mean that South Africa is fiscally out of the woods. Future risks to fiscal policy remain.”
He says successfully managing the fiscal risks now depends on a credible fiscal strategy to balance the books being embodied in the third budget to be presented shortly.
Parsons points out that the advantages of the delayed budget and the controversy that surrounded it are three-fold.
“They identified better options available to balance the budget on both its spending and tax sides will subject future budgets to a more intensive consultative process and again emphasised the urgent need for much higher economic growth.
“It is now even more necessary, especially given current global developments, for South Africa to speedily accelerate key structural reforms to expand the economy. Fiscal sustainability must be reinforced by stronger economic growth that enlarges the tax base and boosts tax revenues.”
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Reversing VAT increase good for economy and consumers
Evádne Bronkhorst, senior manager for tax consulting at Forvis Mazars in South Africa, welcomed Treasury’s decision to withdraw the proposed VAT increase. She believes this move, although it creates a R75 billion revenue shortfall over the medium term, is a step in the right direction for consumers and the broader economy.
“This decision helps to ease inflationary pressures and prevents additional strain on consumer spending, especially for low-income households.”
However, she warns that the financial gap it creates will increase pressure on Sars to drive revenue collection through improved debt collection and compliance measures and by broadening the tax base technology.
Bronkhorst also cautions that rolling back the already-implemented VAT changes will place a heavy administrative burden on small businesses. Many had already adjusted their systems and pricing and will now need to reverse those changes.
“While the reversal brings some short-term relief, it is not enough to truly stimulate the South African economy. We urgently need expenditure reallocation and fiscal accountability that leads to real, sustainable change.”
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No more VAT increase good news, but not a solution
Alan Mukoki, CEO of the South African Chamber of Commerce and Industry (SACCI), also welcomed the decision to scrap the VAT increase, but says while this is a positive move it is by no means a resolution of the bigger problem with South Africa’s finances.
“We still have a serious problem with how to deal with the budget and in particular the deteriorating debt servicing costs to revenue. The situation is not sustainable and we appreciate the difficulty the minister of finance has faced in balancing his revenue and expenditure options.
“We do not underestimate the complexity of the problem. This is no longer about the political parties or GNU. This is South Africa’s problem that will require all key stakeholders to spend more time looking for solutions instead of amplifying problems and differences.”
SACCI was opposed to the VAT increase because it would make goods and services more expensive and this will contribute to the loss of business confidence and aggravate slow economic growth and unemployment.
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Not enough work went into decision for VAT increase
“We are not yet convinced that enough expert work has been undertaken to investigate and look at expenditure throughout the government service. Other than a budget being a budget, it should also serve as a management information tool that gives insight that leads to management action.
“Data and analytics will help us to get a grasp of what is really happening with expenses and at this time we are not clear on this aspect. To get the level of granularity required would need an external resource to undertake the work.”
Mukoki points out that Treasury staff are engaged with their day to day work and may not be the appropriate resource in this case.
“This work should encompass all levels of government and not just national departments as local government actions have a significant impact on the economy. We need this work to be commissioned as a matter of urgency.”
