The Easier Alternative to a VAT Hike.
(4 mins)
Hi Friends
2 weeks ago we were all left in shock when our Finance Minister, Enoch Godongwana, postponed his annual budget speech. This is unprecedented in the 31 years of South Africa’s democracy, but it provided us with a positive perspective of the Government of National Unity (GNU); it showed us that decisions with far reaching impact are no longer going to be rubber stamped by one political party.
The reason for the postponement was because other parties in the GNU, as well as some ANC members, did not support the Finance Minister’s decision to hike Value Added Tax (VAT) by 2%. There has since been debates and discussions about what the alternative to a VAT hike could be, and for me, I believe that there is one alternative so that is what I will discuss in this Newsletter today.
Why Do They Want To Increase VAT?
The plain and simple answer to this; government need to find R58 billion to cover the shortfall for the budget for 2025/26 and they do not want to take on more debt on SA’s balance sheet.
SA’s balance sheet already has R5.75 trillion in debt, yes TRILLION, so you can understand not wanting to take on more debt. They also did not want to increase corporate and personal income taxes because they acknowledged that it would have many negative impacts on citizens and the national budget. However, as the alternative, government went for the easiest mechanism to increase government revenue; increasing VAT. This would obviously come from household spending.
Do they not know how badly we are struggling to survive in this country?
A VAT hike from 15%-17% would have created this R58 billion government is looking for, but that would have made everything more expensive. Petrol, groceries, electricity, leisure, clothes and everything else would become more expensive.
South Africans really cannot afford that right now.
Suggestions from Political Parties and Economists
Everyone and their uncle with a platform has provided suggestions on alternatives to a VAT hike.
Some suggestions include;
Decreasing Ministers cabinet size.
Cut spending where there’s continuous budgets not being spent e.g. SETAs
Reduce government advertising and travel budgets by 50% and 33% respectively
Give SARS R3 billion to help increase tax compliance from 63% to 67% (this could raise an estimated R60 billion per year).
All relevant ideas but I believe there will be so much admin in trying to implement these suggestions.
My Suggestion
So what do I have in mind? I have 2 suggestions to be enacted together, namely;
Postpone Medical Tax Credits for 1 year.
Decrease planned expenditure for giant years long infrastructure projects.
Why cancel medical tax credits for 1 year?
When a citizen contributes to a medical aid, they receive a medical tax credit. As SARS puts it, “A Medical Tax Credit is a rebate which, in itself, is non-refundable, but which is used to reduce the normal tax a person pays.” People receive R364 back per month and this R364 per month goes towards decreasing how much tax you pay. Medical tax credits cost government ~R32 billion.
Now hear me out.
75% of VAT is derived from middle - upper income households according to Treasury, so this means that the R58 billion shortfall government is seeking to plug with a VAT hike would have come from upper - middle income households in the large majority. These are also the households that are on medical aid.
Now, these same households I am talking about above, according to Treasury, spend R10 000 or more per month which means they pay R1 500 or more in VAT per month. Now if government increases VAT by 2%, the VAT those households will pay becomes R1 700 or more, an increase of R200. Now if we go back to the medical tax credit, that R364 benefit per month all of sudden (in theory) shrinks to R164 per month as a result of you paying R200 more in VAT. All of a sudden, the benefit is no longer as attractive as it used to be.
This is why my suggestion is, for just 1 year, government must postpone the medical tax credit and use that ~R32 billion to go towards covering the R58 billion budget shortfall. And if the economy grows as they project it to grow in the following year and there is no budget shortfall, they can reinstate the medical tax credit. A small sacrifice to benefit the longer term goal.
Why decrease infrastructure expenditure?
I will not spend too much time here but over the next three years, public infrastructure spending amounts to more than R1 trillion.
Current infrastructure investment focuses on three critical sectors:
R402 billion for transport and logistics,
R219.2 billion for energy infrastructure, and
R156.3 billion for water and sanitation.
The South African National Roads Agency (SANRAL) will spend R100 billion over the medium term.
I believe that we could go take; R20 billion from the transport and logistics budget, R3 billion from the energy budget, R3 billion from the water budget and voila, there is the remaining R26 billion to cover the R58 billion budget shortfall (with the ~R32 billion from medical tax credits being postponed).
These infrastructure projects always take forever and are always riddled with corruption. I believe that it would make more sense to delay those future projects by a couple of months, rather than adding VAT to South Africans who are already squeezed tight financially.
I hope you found value in my suggested alternative to a VAT hike.
Stay Savvy.