On Thursday morning South Africans woke up to the news that Finance Minister Enoch Godongwana has withdrawn the proposal to hike vat by 0.5 basis points this year to be followed by a potential 0.5% next year.
Frank Blackmore, lead Economist at KPMG, told Business Report that he thinks this was good news for most South Africans as it spares them an additional stress of increasing prices on numerous goods throughout the economy in an environment where they already facing a very high cost of living.
He added that the VAT U-turn was down to mainly two reasons.
“The first reason was obviously the social backlash that was received on this proposal and the second was that the revenue authorities managed to collect an extra sort of R10 billion from the previous year. Therefore, there was no need to institute a vat hike to get this additional revenues,” Blackmore said.
“Even in the planning, the additional revenues that would have come from this half a percentage point of our time could have been around R13.5 billion but if you take the zero rated goods into account that reduces to around this R10 billion making it a moot point for this budget. I think it’s important to note that South Africa is also facing a lot more stress given the pressures put on it and by the global trade war that is currently ongoing,” Blackmore said.
“I think the next thing from the budget that will be adjusted will be the growth rate in Minister Godongwana’s budget that had been tabled. The growth rate for this year for South Africa was at 1.9% but given the events in the US of the imposition of tariffs as well as our local missteps in terms of policy and management, I think we’ll be lucky to get close to that 1% growth this year. Therefore, expectations of revenue would be paid back along with that growth rate for this particular year. I think it’s also important that with the cancellation of this proposed vat hike that the extra money is found through expenditure, savings, and on unnecessary areas of expenditure and does not come importantly from service delivery which is relied on by most South Africans in terms of health, education, social grants and other public sector delivery that is expected,” the economist added.
“I think it is vital for that to happen that costs or cut and expenditures is left alone in order to create some kind of momentum in terms of economic growth in future,” Blackmore added.
The Congress of South African Trade Unions (Cosatu) on Thursday said it applauds the Minister’s announcement that government will scrap the proposed VAT hike of 0.5%.
The trade union added that this will provide relief to millions of workers who have been struggling to cope with the rising costs of living.
“Working- and middle-class families spend most of their income on transport and electricity whose increases far exceed CPI. A VAT hike and not adjusting Personal Income Tax (PIT) brackets for inflation would simply make their lives even more unbearable. Whilst this year’s Parliamentary budget processes have been anything but elegant, we are pleased that government led by the African National Congress, has shown the humility to listen to COSATU, other organisations and society, and the political maturity to respond decisively. These are signs of a vibrant democracy and a signal that government must listen to the frustrations of working-class communities,” Cosatu stated.
Meanwhile, Abigail Moyo, spokesperson of the trade union UASA also welcomed the announcement.
“The decision is a victory for the hardworking people of South Africa, particularly the poorest of the poor, against the backdrop of limited growth prospects in an uncertain geopolitical and global environment. We have seen all investment strategies presented before, as well as the increased taxes over the years. Yet, the government has not succeeded in growing the economy or reducing unemployment and the national debt to a level that harnesses economic growth and development,” Moyo said.
“While this is excellent news for workers, the Treasury has warned that it will result in a R75 billion shortfall for the Fiscus. UASA trusts that the government will recoup the income lost by cancelling the VAT increase. There are many ways that the government can cut expenses and accumulate funds to grow the economy without placing workers under more financial duress. Investigating the corruption and over-expenditure in state departments will go a long way. Godongwana is also withdrawing the Appropriation Bill and the Division of Revenue Bill to propose expenditure adjustments to cover the shortfall. These two pieces of legislation were due to be considered by the National Assembly in May and June, respectively,” Moyo added.
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