Price hikes ahead? Economists predict a VAT increase

You might have to brace yourself for higher prices as economists predict a Value-Added Tax (VAT) increase ahead.

Finance Minister Enoch Godongwana will deliver the 2024 budget speech in Parliament next week.

As South Africa awaits to hear how Godongwana plans to sail through the economic tide, expert predictions suggest a likely increase in VAT.

READ MORE: The Robin Hood effect: Govt ‘likely to increase VAT to provide for permanent SRD grant’

Finding the funds

In last year’s Medium Term Budget Policy Statement (MTBPS), National Treasury proposed tax increases amounting to R15 billion.

PwC said raising this amount would require a 0.5% increase in tax rates across all tax bands – including Value-Added Tax (VAT).

Meanwhile, Social Development Minister Lindiwe Zulu recently said increasing VAT was a likely option to fund basic income grant.

READ MORE: Basic Income Grant: ANC govt considering funding options, says Lindiwe Zulu

SRD Grant

According to PwC a VAT increase is the most favourable way to raise some of the funds needed to meet Treasury’s target.

“The most economically efficient and least harmful way to raise the additional tax revenues of R15 billion that National Treasury indicated would be introduced in Budget 2024, would be by way of a 0.5% increase in the Vat rate to 15.5%,” said Kyle Mandy, PwC SA Tax Leader.

PwC believes government’s extension of the SRD grant, the need to fund it and the possibility to make it permanent, could justify a VAT increase.

“When viewed together, an increase in VAT in order to fund social spending,
particularly in the form of a means tested grant, is highly progressive in aggregate,” PwC said.

ALSO READ: Sona 2024 promises: Will SRD be ‘improved’ to Basic Income Grant?

‘Knee-jerk reaction’

Over the last year, rising living costs amid record-high inflation have left many South African households financially overstretched.

With very little to spend, the slightest price increase is enough to send any breadwinner into panic mode. So, is a VAT increase wise considering the current economy?

The Pietermaritzburg Economic Justice and Dignity Group (PEJDG) doesn’t think so, adding that government should find revenue to fund the SRD elsewhere.

“We argue that the idea to increase VAT is not well considered.  It seems to us that it is a knee jerk reaction to bring in more revenue but it will hurt poor people because poor people pay VAT,” PEJDG said.

The PEJDG also believes the revenue gained from increasing VAT would result in a need for further revenue down the line to mitigate the “suffering” caused by raising VAT.

“The revenue gained from an increased VAT-rate is likely to be less than the revenue that will be required to meet the additional expenditure to counter the negative consequences of the increased VAT-rate,” PEJDG said.

READ MORE: Increasing VAT will not end brutal cycle of poverty

‘Knock-on effects’

“If the consumer’s not doing well, the economy’s not doing well,” said Lullu Krugel, PwC Chief Economist and Africa Sustainability Platform Leader.

Mandy said a VAT increase would essentially have the same effect as raising interest rate as it would reduce disposable income.

“All of these things have implications, and they’re trade-offs at the end of the day, along with the political considerations,” he told The Citizen.

Kruger explained that while the inflationary and cost pressures of increasing VAT were worth considering, taking into account the implications of keeping it at the same rate was equally important.

“If we don’t get our debt levels under control, it could lead to further deterioration of the currency,” she told The Citizen.