NONTANDO NOLUTSHUNGU: Alternatives to the VAT increase — lessons from the Arab Spring, Ghana and Kenya

The National Treasury has persisted with its controversial and ill-advised VAT increase, though at a lower level than initially proposed of two 0.5 percentage point increases over the next two fiscal years.

When considered together with social grant allocations, it is unclear whether the lower VAT increase is less harmful to poor households than the initially proposed two percentage point increase. 

We believe any increase, no matter the percentage margin, will have a serious negative effect on the most vulnerable South Africans, the majority of whom are rural and urban working class poor households.   

This is because while the VAT increase would be lower, the allocation to social grants — the primary source of income for many poor households — over the medium term is also lower by R15bn compared to finance minister Enoch Godongwana’s first proposed budget. 

VAT is SA’s second-largest source of tax revenue, contributing about R400bn annually, or about 30% of total tax revenue, according to the National Treasury.

The initial two percentage point increase could, in theory, have generated an additional R50bn-R80bn a year. This could have helped reduce the budget deficit, which now exceeds 4.5% of GDP; stabilised public debt, which is projected to reach 73% of GDP by 2026; and funded critical social welfare programmes in healthcare, education and infrastructure.    

The lower increase in the VAT rate is partially compensated for by across-the-board freezes in personal income tax brackets. While these brackets have in the past been adjusted for inflation, the move to freeze all brackets is an untargeted approach and means individuals in lower-income tax bands will also face higher taxation. This, together with the proposed VAT increase, places an undue burden on poor and lower-income households.

An equitable approach should freeze only higher income brackets, ensuring that low-income households are protected from the high cost of living. 

Blunt instrument

However, VAT is a blunt instrument whether it is raised or not. It disproportionately affects low- and middle-income consumers, who spend a larger share if their income on VAT-inclusive goods, worsening inequality and economic hardship for the poor and working class households. 

SA’s official unemployment rate stands at 32.1%, but if discouraged job seekers are included the expanded definition exceeds 40%, according to Stats SA. The average South African earns about R14,000 a month, yet a large portion of the population earns far less, with about 18-million individuals depending on social grants.

For most low- and middle-income consumers, poor and working class South Africans, a VAT increase would erode real wages, worsening the cost-of-living crisis; reduce household consumption, particularly on nonessential goods; and force businesses to cut costs, leading to potential retrenchments and business closures. 

Fifteen years ago a wave of revolt spread across the Arab world from Tunisia to Egypt, Syria and Yemen, in protest against authoritarian, unaccountable and corrupt regimes that ignored the hardship, suffering and the high cost of living endured by the youth, unemployed graduates and the general dejected masses. People rose up to protest against authoritarianism, corruption, poverty and the mismanagement of the economy.

Mass protests 

When Ghana raised its VAT from 10% to 12.5% in 1995, mass protests forced a reversal. And, not long ago, when Kenya tried to impose tax hikes in 2024 through the Finance Bill, Kenyans took to the streets, with some storming parliament, forcing President William Ruto to withdraw the bill.

These events, sparked by tax hikes that had no regard for the living conditions of ordinary citizens and did not address the mismanagement of the economy, corruption and chronic government failures such as austerity policy, could occur as easily in SA because of the fertile ground that has been cultivated over the past 30 years of ANC misrule and policy misdirection.

As things stand the proposed VAT increase is likely to be passed due to the support of the minority parties that have coalesced under the banner of the so-called government of national unity (GNU), despite objections from a wide range of organisations, political parties, civil society formations and trade unions.    

Yet it is patently clear that a VAT increase will never be a panacea for fixing a structural economic crisis, austerity measures and the budget deficit caused by many years of ANC’s mismanagement and corruption.   

Government is set to miss the opportunity to table alternative, progressive revenue-raising and collection measures and ensure adequate resourcing for social economic priorities such as education, healthcare and social services, including energy, electricity, water and sanitation provision. It could also continue the expansion and sustainable funding for the social relief of distress grant for the unemployed who are unable to meet their families’ most basic needs.   

Wastage and corruption

Government has several alternative revenue raising options and strategies. These include strengthening the SA Revenue Service’s institutional capacity to improve tax compliance and enforcement. Sars estimates that tax evasion, transfer pricing and illicit financial flows, including underreporting, cost the economy more than 100bn a year. It could also reduce government wastage and fight corruption.

Currently, the country loses R50bn-R100bn annually to wastage and corruption, so addressing inefficiencies in government, including in state-owned enterprises, could free up billions for public spending. 

We could also expand the tax base through growth policies. This could be achieved by encouraging investment through industrialisation, manufacturing and the expansion of technology and digital investment in rural areas.

And it is time to impose wealth taxes on high net worth individuals through a progressive wealth tax on assets exceeding R20m-R50m, as this could generate additional revenue without harming low-income consumers.

As of March 32 2022 the Public Investment Corporation (PIC) had R2.548-trillion under management, R2.278.7-trillion or 89.4% of this being Government Employees Pension Fund holdings. Government needs R60bn for its budget deficit to meet its education, health and basic infrastructure services obligations. This amount taken from the PIC’s employee pension fund reserves will not harm or deplete employee’s savings as long as disciplined and prudential use and monitoring control systems are in place, and parliament’s standing committee on public accounts (Scopa) and the auditor-general play an oversight role. 

Government could also tap into the gold & foreign exchange contingency reserve account (GFECRA), a facility held by the SA Reserve Bank that the National Treasury has used in the past. It has more than R459bn in reserves available for government to use in the public interest. Of course, if the National Treasury was to tap into the GFECRA this would have to be under stringent and non-negotiable conditions and controlled by Scopa and the auditor-general’s office, with the National Treasury required to report on a quarterly basis to justify every cent spent by government departments.

However, the National Treasury must first account on how the last allocation of R150bn from the GFECRA was used. The EFF will oppose any careless and reckless use of the GFECRA reserves with nefarious motives and intentions. We will oppose any notion that fiscal discipline should be forsaken for expedient solutions and selfish purposes.    

Unless the ANC considers alternative sources of funding, as proposed above, when the National Treasury tables its budget with its 0.5 percentage point increases, all pro-poor and working class-biased political parties, led by the EFF, will vote no. The EFF has declared 2025 the year of the picket lines, underlined by grassroots activism and community mobilisation until this anti-black, anti-poor and neoliberal regime is removed from office. 

• Nolutshungu is EFF treasurer-general.