FINANCE Minister Enoch Godongwana and President Cyril Ramaphosa are doubling down on a proposed VAT hike and warn that the ANC will go over the DA’s head should it not agree with the proposal, a move that threatens the GNU.
According to the Sunday Times, The ANC warned the DA that it would approach the EFF for the required votes if the DA refused to accept a smaller VAT increase.
In the initial budget, Godongawana proposed a two-percentage-point increase in VAT, which was met with strong resistance from the DA and other opposition parties.
This opposition forced an unprecedented last-minute cancellation of the February budget speech, the first time the presentation had been cancelled over such a disagreement in 31 years.
Following consultations throughout last week, it has been reported that Godongwana has revised his proposal, suggesting a more modest 0.75 percentage point increase.
However, the DA still disagrees with the new proposal. Following this, the ANC reportedly warned DA leaders that President Ramaphosa’s patience with their objections was wearing thin, adding that the ANC was reserving its options in a possible approach to the EFF.
The EFF, like the DA, has opposed Godongwana’s VAT hike. However, the party has previously stated that it would consider joining the Government of National Unity (GNU) if the DA were to leave.
The Sunday Times noted that this situation could arise if the current disagreements over VAT aren’t resolved before the upcoming budget date on 12 March.
Godongwana wants to use the VAT increase to fill a R60 billion shortfall in government finances, which is needed to cover key expenditures. These include civil servant salary increases, infrastructure projects, school feeding programs, early childhood development, and an extension of the R350 Social Relief of Distress (SRD) grant.
According to Godongwana, the SRD grant alone requires an additional R35.2 billion in funding to be extended until March 2026. Finance Minister Enoch Godongawana DA chief whip George Michalakis previously made it clear that the GNU is not a rubber stamp for bad policies.
At the same time, party leader John Steenhuisen reiterated that his party would not support any tax increase that disproportionately affects the poor.
Despite this opposition, government insiders told the Sunday Times that Ramaphosa and Godongwana are determined to find a way to push the increase through, even if it means threatening alliances within the GNU. Critics of the VAT hike, including economists from the Bureau for Economic Research (BER), argue that such an increase would have broader negative effects on South Africa’s economy.
The BER has warned that a VAT hike would likely increase inflation by at least one percentage point, leading to potential interest rate hikes by the South African Reserve Bank (SARB).
“If inflation spikes by 1 percent, SARB’s policy models indicate an appropriate repo rate of around 8.3 percebt, meaning higher borrowing costs for businesses and consumers,” the BER said.
It added that although VAT itself does not directly impact investment, the resulting increase in interest rates could have a ripple effect, dampening economic growth and job creation.
Despite these concerns, the ANC has countered with research from the University of Cape Town suggesting that the proposed VAT increase would have a minimal impact on the poor. According to the study, VAT is mildly progressive when zero-rated goods are considered.
The ANC has also indicated plans to expand the list of zero-rated goods to further protect low-income households. Professor Haroon Bhorat, a researcher cited by the ANC, stated that while VAT is not a strong redistributive tool, it remains distributionally neutral and does not disproportionately burden the poor.
DA leader John Steenhuisen told the Sunday Times yesterday that his party remained opposed to any proposal to increase VAT. Steenhuisen also downplayed the possibility of the DA being replaced by the EFF, stating that if the EFF supports a VAT hike, it will have to explain the decision to its voter base. – BusinessTech
