South Africa Proposes Smaller VAT Increase in Revised Budget Amid Opposition

South Africa’s National Treasury has proposed a smaller VAT increase of 0.5 percentage points in a revised budget to resolve government deadlock, following opposition from coalition partners. The increase aims to fund essential services but faces resistance from the Democratic Alliance and others. This marks a significant challenge for the ANC in navigating its coalition government amid rising inflation concerns.

On March 12, South Africa’s National Treasury proposed a smaller value-added tax (VAT) increase in a revised budget, aimed at resolving a deadlock within the coalition government. The initial proposal called for a 2-percentage-point increase, which faced opposition from the African National Congress’s (ANC) largest coalition partner, leading to a postponement of the budget. The revised plan suggests raising VAT by 0.5 percentage points from the current 15% starting May 1, with an additional 0.5 percentage-point increase slated for 2026.

Ahead of Finance Minister Enoch Godongwana’s presentation, Democratic Alliance leader John Steenhuisen confirmed his party’s opposition, stating, “The DA will not support the budget in its current form” on X. This budget marks a significant test for South Africa’s coalition government, which was established after the ANC lost its parliamentary majority for the first time since the end of apartheid in 1994. The ANC requires support from another major party to ensure the budget’s passage, but external parties, like the Economic Freedom Fighters, also oppose the tax increase.

The Treasury cited “new and persistent” spending pressures as the rationale for the VAT increase, which would support health, education, and rail initiatives. Minister Godongwana stated, “This decision was not taken lightly. We thoroughly examined alternatives to raising the VAT,” emphasizing that a tax hike would be the optimal method to avoid further spending cuts. The proposed tax measures are projected to yield an additional 28 billion rand (approximately $1.53 billion) in revenue for the fiscal year beginning April 1, 2025, which falls short of the initially anticipated 58 billion rand.

The budget documents reveal additional funds will be sourced from contingency reserves. The budget deficit is projected at 5.0% of the gross domestic product (GDP) for the 2025/26 fiscal year, with public debt expected to peak at 76.2% of GDP during that same period. Consumer inflation is also anticipated to rise as a consequence of the VAT increase.

In summary, South Africa’s National Treasury has revised its budget proposal to include a smaller VAT increase of 0.5 percentage points, facing significant opposition within the coalition government. Finance Minister Enoch Godongwana highlighted the pressing need for funding amidst spending pressures, while acknowledging the potential for increased consumer inflation. The outcomes of this budget will critically depend on garnering the necessary parliamentary support to secure passage amid existing ideological divisions.

Original Source: www.cnbcafrica.com