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An increased VAT rate will disproportionately impact middle and low-income earners.
Picture: iStock
The National Treasury did not consider South Africa’s current economic challenges in certain areas when formulating the national budget, parliament has heard.
On Wednesday, the Standing Committee on Appropriations was briefed by the Parliamentary Budget Office (PBO) on the Division of Revenue Bill, which was tabled last month as part of the national budget.
The Division of Revenue Bill sets out how government revenue is allocated among the national government, provinces, and municipalities.
The PBO assessed whether the budget and revenue proposals were effectively addressing or exacerbating financial vulnerability among South African households.
It acknowledged that the National Treasury has committed to protecting vulnerable households from the proposed value-added tax (VAT) increases through above-inflation social grant adjustments, expanding the list of zero-rated food items, and refraining from increasing the fuel levy.
However, the office warned that these measures alone might not be sufficient to shield vulnerable households from the broader inflationary effects of a VAT increase.
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The PBO also highlighted the 2024 essential food pricing monitoring report, which found that retail prices of essential foods remained persistently high despite lower production costs and fuel prices.
“This suggests that retailers are not adequately passing savings to consumers,” a PBO official told MPs on Wednesday.
The office further stressed that an increased VAT rate would disproportionately impact middle and low-income earners, who typically spend over 68% of their income on essentials such as food, water, electricity, and housing.
“Wealthier households are able to invest in their wellbeing and financial security, while low-income households spend almost entirely their whole income on survival.”
Additionally, the PBO pointed out that Treasury’s argument — stated during Finance Minister Enoch Godongwana’s budget speech — that South Africa’s VAT rate is low compared to peer countries fails to account for the country’s extreme wealth and income inequality.
“The bottom half of the population holds negative wealth, meanwhile the top 10 percent holds at least over 85% of the total wealth in the country.”
By comparison, the office noted that peer countries such as Brazil, Mexico, and Turkey have a less concentrated distribution of wealth and income.
“People in these countries are less vulnerable to the regressive effects of indirect taxes.”
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The PBO further suggested that Treasury’s justification for the VAT increase is misleading.
“By comparing our VAT to countries with higher VAT, [you] don’t take into account that these very countries have a lower unemployment rate.”
Concerns were also raised about Treasury’s proposed strategy to enhance infrastructure development by mobilising resources through partnerships with the private sector.
This approach, the PBO warned, could have significant implications for the future affordability of critical basic services, including water.
On Tuesday, the Financial and Fiscal Commission (FFC) chairperson, Patience Mbava, informed the Standing Committee on Appropriations that the institution had not been consulted on the Division of Revenue Bill.
“As the commission, we maintain that this process did not happen in terms of the legislation. We highlight this as an issue which parliament would need to consider,” Mbava told MPs.
The fiscal commission’s head of research, Chen-Wei Tseng, echoed this concern, stating that no “substantive consultation” had taken place on the bill.
The minister of finance must consult the FFC at least 14 days before the budget is tabled in parliament and submit a report.
The bill’s tabling must also include a memorandum outlining the extent to which Treasury considered the FFC’s recommendations.
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