The Parliamentary Budget Office (PBO) and the Financial and Fiscal Commission (FFC) have warned that an increase in value added tax (VAT) will negatively affect low-earning households and is unlikely to result in any proportional increase in revenue.
Yesterday, the two entities briefed a joint meeting of the Standing Committee on Appropriations, the Select Committee on Finance, the Standing Committee on Finance and the Select Committee on Appropriations on the 2025 national Budget.
The PBO told the committees that VAT is particularly regressive in the context of a protracted cost of living crisis that many households are facing. Based on its modelling of the initial 2% proposed, the PBO found that the bottom two quintiles of the population currently contribute about 30% of the total annual VAT revenue.
“50% of the VAT burden would fall on the top two quantiles, a VAT increase would disproportionately impact low-income households, potentially exacerbating poverty and inequality,” warned Prof Dumisani Jantjies, the PBO executive director.
Commenting on alternative tax revenues, the PBO suggests that corporate income tax (CIT) decrease could be reversed if it has negative outcomes on revenue.
The PBO also told the committees that Applied Development Research Solutions (ADRS) analysis suggests that a 0.5-1% wealth tax would have raised R38.4 billion in 2023. And that the cancellation of the employment tax incentive could result in R6 to R7 billion a year in additional revenue.
“Curbing illicit financial flows will significantly boost tax revenue. For example, if SARS could follow-up on 10% of IFFs, government would get $350 million (R6.5 billion rands),” said the PBO in its presentation to the committees.
The PBO recommends that Parliament needs to ensure that budgets respond to the three priorities of the Government of National Unity with proper sector plans and monitoring systems in place, and that continuous reprioritisation, based on reviews, is required to respond to the socioeconomic realities.
In its detailed presentation the joint meeting, the FFC also warned that an increase in VAT is unlikely to yield a proportional increase in desired revenues. Data shows that, despite the VAT increase since April 2018 from 14 to 15%, VAT revenue as a proportion of gross revenue remained flat throughout the period. Given the current climate of economic stagnation, empirical findings thus signal the limitations of using VAT as a fiscal instrument for generating additional revenues to ease South Africa’s fiscal pressures, the entity warned.
“The commission calls for a re-examination of the socio-economic and fiscal implications concerning the proposed VAT increase as a fiscal instrument. Particularly the effectiveness in generating additional revenues to support the fiscus in empirical data,” said commission Chairperson Dr Patience Mbava.
The FFC also recommends that the government should embark on a clear fiscal consolidatory path that achieves a zero-balanced budget within three to five years in line with the commission’s proposed strategies. And improve on its forecast accuracies of economic growth on which all financial and fiscal matters is based.
The commission also advised that enhancing transparency, particularly in the handling of debt bailouts to SOEs which have significantly worsened South Africa’s fiscal stance, will be crucial for building fiscal credibility.
The FFC urges the government to expedite its commitments in the 2024 Medium-Term Budget Policy Statement, particularly concerning managing the public-service wage bill through cost containment measures, including implementation of the early retirement programme with pension implications, to alleviate the significant spending pressures on the fiscus.
With respect to the 2025 Eskom Debt Relief Amendment Bill, the commission expressed concern about the fiscal ambiguities of the Eskom Debt Relief Bills and the appropriation of the relevant funds. It added that transparency measures are necessary to improve certainty and foster credibility in the government’s treatment of public funds.
The commission reiterated its call to improve the governance of SOEs, thoroughly evaluating their operating models and streamlining operations by disposing non-core assets.
The Chairperson of the Select Committee on Finance, Ms Sanny Ndhlovu, said the FFC and PBO played an important role in Parliament’s work. “They are here to assist Parliament on the budget process. Their roles and responsibilities are clearly defined in legislation, and we appreciate the information that they share with the committees,” she said.
Mr Mmusi Maimane, the Chairperson of the Standing Committee on Appropriations also welcomed the presentations. Mr Maimane believes the Money Bills and Related Matters Act is due for review. He also announced that his committee is soliciting legal opinion on the implementation of the proposed VAT increase and the role of Parliament in that process.
The House Chairperson for Committees and Oversight in the National Council of Provinces, Mr Dennis Ryder, is of the view that tax increases will not result in job creation and economic growth. He suggested as a solution to budget shortages a cut in unnecessary and wasteful expenditure instead of tax increases.
Mr Ryder also raised a concern that the Division of Revenue allocation is not in line with the projections of the Medium-Term Expenditure Framework and impacts on the planning by the provincial and local governments.
Sakhile Mokoena
19 March 2025
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