South Africa scraps VAT increase in dramatic U-turn after coalition rift

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South Africa’s finance minister has scrapped a controversial VAT increase in a big concession to his party’s main governing partner, after a fierce battle threatened to bring down the country’s grand coalition.

In a late-night announcement, finance minister Enoch Godongwana said the proposal to lift VAT from 15.5 per cent to 16 per cent over two years had been dropped after “extensive consultation with political parties”, leaving a R75bn ($4bn) hole in South Africa’s budget over the next three years.

The move is the first big climbdown since Godongwana’s African National Congress was forced into coalition government after last year’s election, having ruled South Africa alone for three decades.

The result is a “victory for all South African taxpayers”, said Helen Zille, chair of the centre-right Democratic Alliance, the coalition’s second-largest party.

Asked by reporters whether Godongwana should stay in his job, Zille said the fiasco “should make a minister resign”. He “has fundamentally undermined the foundations of that coalition and acted contrary to every agreement we have made until now,” she said.

The ANC has said Godongwana will remain in his post.

The business-friendly DA, which argued the country needed deep economic reforms and spending cuts rather than tax rises, took the ANC to court this week, saying elements of the VAT increase were unconstitutional.

The government pushed the tax rise through parliament in its annual budget, with the ANC relying on the support of smaller parties after the DA rejected the move. It insisted the U-turn was unrelated to the DA’s lawsuit.

President Cyril Ramaphosa’s party, which portrays itself as progressive, is left licking its wounds after putting its weight behind a regressive tax and being thwarted. Meanwhile, the DA has made political capital from blocking a tax increase on all South Africans, one in three of whom are unemployed.

The ANC argued it was not forced into the move. “The DA did not win in cabinet, in parliament or in the courts. What they seek to brand as a ‘victory’ is in fact the result of ANC-led consultations,” it said in a statement. 

But the party’s own chief whip Mdumiseni Ntuli welcomed the decision to drop the tax increase. The affair “underscored the need for a more transparent and inclusive approach” to the country’s spending plans, he said.

Whether the dispute has irretrievably damaged trust between the coalition partners remains to be seen. Zille said “anything can happen” with the coalition from here.

Though her party had signalled it wanted to stay in government, Zille said the ANC must learn that in a coalition, the budget “is the first thing you negotiate — how to spend people’s money”.

The two parties were due to meet on Thursday in a bid to “reset” relations, but Zille said the ANC’s secretary-general postponed the meeting for a day. 

The populist Economic Freedom Fighters, one of the largest parties outside the coalition, backed the call for Godongwana to go, saying in a statement he was “out of his depth”.

The affair could have a lasting impact on the reputation of the country’s treasury, said Ann Bernstein, head of the Johannesburg-based Centre for Development and Enterprise. “Until now, the National Treasury has been a jewel of democratic South Africa but this debacle will surely have undermined confidence in its management of the budget,” she said.

Godongwana, who argued that ditching the VAT increase would leave a hole in the budget, will need to find a way to fill the gap without increasing debt, and establish a “credible spending review” involving all parties to construct a spending framework for the country, Bernstein said.

Godongwana will table a new budget in the next few weeks, but has not yet specified a deadline.