Where will the money come from if not from VAT? – The Mail & Guardian

The government of national unity needs to make up the R56 billion budget shortfall.

It remains to be seen whether the next budget will include a smaller VAT increase at 0.7% or if the treasury will turn to capital markets for more debt. It is unlikely that the finance minister will introduce further austerity measures or hike personal income tax. 

The government of national unity (GNU) faces a Catch-22 situation as a result of the ANC’s PR crisis. Citizens are no longer willing to participate in failed projects of reform and renewal even though the economy needs fiscal relief. 

The real grievance with the scrapped two percentage point VAT increase isn’t about the increase itself, but with continuous taxation at a time when the government is unable to manage finances.

While it is important to arrest financial mismanagement as some analysts argue, VAT is still an important lever to stabilize government debt and makes up 30% of tax revenue, which is about R400 billion. Personal income tax makes up around R800 billion. 

When VAT rose from 14% to 15% in 2018, the South African Reserve Bank noted that the increase does not mean consumer prices will rise by the same amount because VAT does not apply to 43.5% of CPI.

Political parties were quick to cry out how the VAT increase will severely affect lower income households, but essential goods such as basic food items are zero-rated. Additionally, the government can merely include more basic items to the exemption. 

During the 2018 VAT increase the Reserve Bank also noted a meagre 0.7% decline in household spending. The two percentage point VAT increase would have had a similar effect while bringing in much needed fiscal relief.

Taxing the wealthy and increasing corporate tax might seem like viable options, but these measures often lead to unintended consequences — such as capital flight and companies relocating their operations offshore — which ultimately harms the economy.

At the same time, recovering funds from illicit trade and corrupt tender deals is an unpredictable and often frustrating endeavor. Even when authorities such as the Special Investigating Unit step in to trace and reclaim stolen or mismanaged money, success is far from guaranteed. 

Corrupt individuals and organisations are skilled at hiding assets, exploiting legal loopholes, or simply draining funds before action can be taken. When investigations expose wrongdoing, actual financial recovery is rare, which leaves the public with little more than reports of misconduct rather than tangible restitution. 

Cutting budgets of failing departments and government entities as the Democratic Alliance suggests in their alternative budget would not bring in the annual R60 billion from the two percentage point VAT increase nor cover the R56 billion budget shortfall.

Soon, minority parties in the GNU will start complaining about how their departments are poorly funded. This will serve as an excuse to their constituencies on why they could not deliver on their promises. 

Last September, Basic Education Minister Siviwe Gwarube called a media briefing to highlight the low number of teachers and reduced availability of textbooks, as a result of prolonged budget cuts in the education sector.

VAT remains the most reliable and efficient tool for generating government revenue. Unlike corporate taxes, which can be evaded through loopholes, or income taxes, which depend on fluctuating employment levels, VAT ensures a steady flow of funds by taxing consumption.

Every purchase contributes to the national budget, making it a crucial source of fiscal relief, especially during times like these when major infrastructure investments are needed to grow the economy beyond the 1% GDP ceiling.

GNU parties will soon discover that winning over voters from the opposition benches is far easier than running a country. Governing isn’t just about making demands — it’s about making tough choices.

The government requires significant funding to support welfare programmes, especially after the #PaytheGrant court ruling. More resources are needed to stabilise energy supply, renovate railway infrastructure, and build small business enterprises. There is also the transformation fund, National Health Insurance, and skills development initiatives. 

The country cannot afford to lose its current moment and the international capital it enjoys. Failure to marshall funding to reform state-owned entities and municipalities means South Africa will struggle to meet its 3% growth target, a figure that economists argue is essential to reducing the country’s 31.9% unemployment rate.

As the smallest economy in the G20, South Africa’s inability to build world class infrastructure weakens its bargaining power in the Global South. Investor confidence will remain low because of continued underspending on essential infrastructure.

At the end of the day the state needs revenue to operate. But at the same time the unity government is facing a public backlash because of years of poor performance and corruption.  

Indeed, a key contributor to the economic stagnation is because of the financial mismanagement of state-owned entities, particularly Eskom, Transnet and the country’s economic hub, the city of Johannesburg. 

But still, to institute any kind of reforms, especially for the South African Revenue Service to collect more taxes, requires additional funding. Where will that money come from if not from VAT?

Nkateko Mabasa is a writer, climate advocate and policy analyst.