South Africa’s National Treasury has proposed a smaller VAT increase of 0.5% in a revised budget to overcome coalition disagreements. Opposition remains from the Democratic Alliance as the ANC requires additional backing to pass the budget. The government faces substantial spending pressures, with implications for inflation and debt levels in the upcoming fiscal years.
On March 12, South Africa’s National Treasury unveiled a modified budget that proposed a smaller increase in value-added tax (VAT), aiming to resolve ongoing disputes within the coalition government. The original proposal for a 2-percentage-point VAT hike was stalled when the African National Congress’ (ANC) primary coalition partner declined to support it, resulting in a budget postponement.
The Treasury has now suggested raising the VAT by 0.5 percentage points from the current 15%, effective May 1, with another similar increase planned for 2026. However, opposition remains, particularly from the Democratic Alliance (DA), whose leader, John Steenhuisen, confirmed his party’s refusal to endorse the budget in its existing form.
The budget highlights significant challenges faced by South Africa’s coalition government, which was formed last year following the ANC’s loss of its parliamentary majority. For the budget to pass, the ANC will require support from at least one substantial party, with potential opposition from parties such as the Economic Freedom Fighters, who are against tax increases.
The Treasury emphasized “new and persistent” spending pressures necessitating additional funding, with anticipated boosts to healthcare, education, and rail infrastructure. Finance Minister Enoch Godongwana stated that raising VAT was seen as the most viable option to avoid deeper spending cuts, despite acknowledging the consideration of other alternatives.
The revised tax measures are expected to yield an additional 28 billion rand ($1.53 billion) for the fiscal year commencing April 1, 2025, falling short of the 58 billion rand initially projected. Increased funds will also stem from contingency reserves, with the budget deficit anticipated to reach 5% of GDP in the 2025/26 fiscal year, alongside a projected peak in debt at 76.2% of GDP during the same period. It is also projected that consumer inflation will rise due to the VAT adjustments.
In conclusion, South Africa’s National Treasury is grappling with internal conflicts within its coalition government while proposing a smaller VAT increase to fund critical public sectors. Despite modifications to the budget, strong opposition persists, primarily from the Democratic Alliance. The economic landscape shows increasing spending pressures and a projected rise in consumer inflation as the government seeks to manage its budget deficit and public sector needs.
Original Source: www.cnbcafrica.com
