Cut waste, not personal income – IRR

Finance minister Enoch Godongwana’s proposal to increase Value-Added Tax (VAT) and income tax by bracket-creep has been met with overwhelming opposition for good reason.

As the numbers below show, increasing VAT as proposed will mean South Africans spending less than R6,900 per month will have to pay roughly R12.7 billion extra in tax over the next two years.

Given the failures in service delivery, widespread corruption, zero real economic growth per person since 2007, and world-record unemployment, how could the finance minister propose taxing those who earn less than R6,900 by an additional R12.7 billion?

Rather than increasing tax or public debt, spending on BEE premiums should be cut.

That is the recommendation of a Blueprint for Growth report by IRR fellow Gabriel Crouse, Cut VAT & BEE, which estimates that BEE premiums directly cost R17 billion and indirectly cost R135 billion, for a total cost of roughly R150 billion per annum.

Treasury’s 226-page budget review does not contain any data on the cost of BEE premiums in past or future budget cycles. This is an alarming omission, given that BEE premiums are specifically provided for by procurement legislation, which sets the cap currently at 25% for contracts under R50 million.

The lack of transparency around BEE premiums is part of what makes them so indirectly expensive. The related confusion in procurement promotes corruption, as found by the Zondo Report.

Treasury’s failure to reckon with BEE premiums, including the possibility of cutting those premiums to avoid a VAT hike, is a dereliction of its most basic duty. Instead, it has proposed to raise the most regressive tax in the country.

VAT numbers on poverty burden

Treasury estimates the total VAT adjustment will increase revenues by R39.2 billion over the next two years, which comprises an increase of R13.5 billion this year, and R29.8 billion next year, as well as an annual decrease of about R2 billion through new zero-rated items including offal and canned vegetables.

The following table shows how that VAT burden is expected to be distributed across different expenditure quintiles. The (generous) assumption is made that the entire R4.1 billion zero-rating change is distributed among South Africans earning less than R6,900 per month proportionately.

Source: Treasury & Stats SA

Households spending less than R1,300 per month will be expected to spend R1.2 billion extra in tax over two years.

Households spending less than R2,100 will be expected to spend R3.5 billion extra in tax.

Households spending less than R3,600 will be expected to spend R7 billion extra in tax.

Households spending less than R6,900 will be expected to spend R12.7 billion extra in tax.

Economic research has found that the previous VAT hike of 2018 hit poorer households the hardest, relative to income. The bottom decile’s incomes were reduced by over 6% due to that VAT hike, while social spending increases meant to soften the blow were found not to compensate for reduced incomes.

Popularity: Cut BEE or raise VAT?

What would most South Africans prefer: increasing the tax burden on people earning less than R6,900 by R12.7 billion, or cutting BEE premiums?

A 2024 poll commissioned by the IRR indicated that roughly 70% of respondents preferred cutting BEE premiums to R0. Within that group some wish to keep race as a tiebreaker, and others wish to do away with racial preferences entirely.

On the other hand, there is no real doubt that most South Africans would prefer not to increase VAT.

Summary

Hiking VAT by R39.2 billion and personal income tax by R19.5 billion to keep paying for BEE premiums that go to millionaires and billionaires is counterproductive, and unpopular.

There is an opportunity for fiscal decision makers to do the right thing, since the VAT hike is not expected to be passed by Parliament. A winning budget should simply embrace the Zondo Commission’s advice to “derive maximum value-for-money in public procurement”.

Media contact: Gabriel Crouse, IRR Fellow Tel: 082 510 0360 Email: gabriel@irrlegal.org.za

Media enquiries: Michael Morris Tel: 066 302 1968 Email: michael@irr.org.za