South Africa’s National Treasury proposed a smaller VAT increase to 0.5% from 15% amid coalition tensions. Opposition from the DA complicates support for the budget. The government faces financial pressures with projected deficits and inflation rises due to the tax adjustment.
On March 12, 2023, South Africa’s National Treasury proposed a reduced value-added tax (VAT) increase in a revised budget, attempting to overcome governmental deadlock. Initially, a 2-percentage-point hike was suggested, but opposition from the African National Congress’s (ANC) coalition partner led to a budget postponement. The new proposal suggests an increment of 0.5 percentage points from the current 15% starting May 1, followed by another increase in 2026.
The proposal faces opposition from the Democratic Alliance (DA), as leader John Steenhuisen explicitly stated, “The DA will not support the budget in its current form,” which reflects ongoing tensions within the coalition government. This budget is a significant challenge for the ANC, which has lost its parliamentary majority for the first time since the end of apartheid in 1994, necessitating support from at least one coalition partner to pass.
The Treasury emphasized the necessity of funding amid “new and persistent” spending pressures. Finance Minister Enoch Godongwana noted that the tax hike, aimed at funding health, education, and rail projects, was critically examined against other alternatives. The revised budget anticipates generating an additional 28 billion rand ($1.53 billion) in the fiscal year commencing April 1, 2025, although this number is lower than the initially projected 58 billion rand.
The updated fiscal outlook reveals a projected budget deficit of 5.0% of gross domestic product for the 2025/26 fiscal year, with government debt expected to peak at 76.2% of GDP during this period. The VAT increase is also anticipated to contribute to rising consumer inflation in the country. Other sources of funding will be pursued through contingency reserves, according to the revised budget documents.
In summary, South Africa’s National Treasury has revised its VAT increase proposal to ease governmental tensions while addressing urgent funding needs. Despite the adjustments, significant opposition remains, particularly from the DA. The fiscal landscape shows rising deficits and debt levels, underlining the challenges that the ANC faces in navigating its coalition government. The impacts of the VAT hike on consumer inflation further complicate the situation.
Original Source: www.cnbcafrica.com
