Increasing VAT will not end brutal cycle of poverty

Increasing VAT to fund the Social Relief of Distress Grant will not end the brutal cycle of poverty or grow the economy. Poor South Africans need the grant, but government will have to find the money somewhere else.

This is the opinion of the Pietermaritzburg Economic Justice and Dignity group, which conducts a monthly survey of food prices for low-income consumers. The survey is done by women from low-income households in areas where they live and the group often talks to them about the struggle they face to put food on the table.

The food items that make up the household food basket are those the women try to buy each month. The basket contains 44 basic foods and 22 are subject to Value Added Tax (VAT). In September the VAT on the basket was R312,83.

Compare this to the price of 30kg of maize meal per month for a family of seven that cost R309,69 in September. It is clear that VAT is therefore relatively expensive, as it is equivalent to the cost of securing the most basic staple food.

The cost of the 22 food items subject to VAT make up 47% (R2 398,36) of the total cost of the basket (R5 155,77). The VAT on these 22 foods of R312,83 means that 6,1% of the total household food basket is made up of VAT, Mervyn Abrahams, programme coordinator of the group, said.

“Households living on a low income, including social grants, are highly exposed to VAT. Our data shows VAT already places a heavy financial burden on households and removes food off the plate for them.”

Abrahams said when government talks of increasing the VAT rate it must carefully weigh it up against the current situation where so many families are already struggling to put food on the table. In particular, nutritious foods that are almost impossible to secure, as the high cost of basic staples use up all available money in the household purse.

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Zero-rated foods are not cheap or affordable

“It is also important to note while zero-rating some foods helps to bring down the cost of essential basics, it does not mean that these zero-rated foods are affordable or cheap. Zero-rated foods are still relatively expensive and therefore zero-rating is not enough in itself to make food affordable.”

He said as food is so important for people to reach the outcomes of all government financial expenditure and investments in education, health, society and the economy and because food inflation is so unpredictable with already high food prices, raising the VAT-rate on food will have severely negative consequences for most families.

“Increasing the VAT-rate to augment government revenue will likely cost more money in health care and education, more money to quell social dissent and hurt future economic productivity and growth. Therefore, the revenue from an increased VAT-rate may not be worth the additional expenditure which will be required to counter the negative consequences of the increased VAT-rate.”

Abrahams pointed out VAT is a regressive tax. Unlike other taxes, such as personal income tax where the rate is calculated on your income so that people who earn less pay less tax, VAT has no equity principle to protect families by charging them different rates according to their income, nor to what they spend their money on.

“It means that VAT disproportionally hurts families living on a low income. Although they contribute less in Rand-value to total VAT than better-off families, having less money to spend and the amount of VAT they pay in Rand-value takes away a lot of money which they could spend to buy more food and other critical goods and services.”

The way government applies VAT in South Africa does not lend itself in its current form as an instrument to bring in revenue specifically targeted for disbursement to welfare or financial assistance programmes to millions of families, Abrahams said.

“The regressive nature of VAT means that you are raising revenue also from the very people that you intend to help and not just from people who can afford the additional expense. Raising the VAT rate will hurt poor people and government will therefore have to reimburse millions of poor people for the money it has taken from them.”

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Government must not show disdain for poor people

He said government must also be careful about the disdain it appears to have for poor people, including blaming poor people for their situations, as this is pitting the struggling middle-class and ignorant elites against the poor.

He said government decided to set the social grants, the SRD R350 grant and the National Minimum Wage at low levels that does not allow the recipients to escape poverty. Abrahams added government, by design, caused the crisis of continuing to have to find the money to pay out welfare or financial support forever.

In addition, the non-payment of social grants in September, not for the first time, undermined the maximum value that can be extracted from providing social security and financial support, he said.

“The administration of grants is critical. Grants must be provided in full, on the notified date every month to give people confidence and stability and allow them to plan carefully how to use this money in the best way they can. Although the grant value is not enough, just knowing that there is absolute certainty around receiving it each month, allows people to do miracles with it.”