Business sector warns of ongoing fiscal challenges after VAT hike reversal

Treasury says decision follows extensive consultations with political parties, and the recommendations of Parliament

- YOGASHEN PILLAY

SOUTH Africa's business sector has cautiously welcomed the scrapping of the proposed 0.5 percentage points increase in the value-added tax (VAT) as a crucial relief for consumers, the country's fiscal position remained severely strained.

However, the business industry said that the government would have to find alternative measures to raise enough revenue to plug the national budget deficit amidst rising debt-servicing costs and other national expenditure priorities.

This comes as the National Treasury on Thursday announced that Finance Minister Enoch Godongwana will no longer be increasing the VAT from 15 to 15.5% from 1 May, which was proposed in the National Budget to plug the R58 billion fiscal deficit.

North West University Business School economist, Prof Raymond Parsons, said a rise in VAT brought welcome relief and certainty to business and consumers, and to that extent is confidence-building. However, Parsons said this did not mean that fiscally South Africa was out of the woods.

"Future risks to fiscal policy remain. Successfully managing these now depends on a credible fiscal strategy 'to balance the books' being embodied in the third budget to be presented shortly by the Treasury to Parliament," Parsons said.

Treasury said the decision to forgo the increase followed extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees.