R60 billion: where will the money come from?

VAT HIKE SCRAPPED

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THE Finance Minister in South Africa has decided not to impose the 0.5% increase in VAT proposed for May 1, 2025. This comes after weeks of political tussle and debate between members of the Government of National Unity (GNU) as well as various parties.

Indeed, this point may be the reason for a potential abrogation of the GNU.

The increase of 0.5% on May 1 and a further 0.5% in a year was expected to add a cumulative R30 billion to our national revenue, while the SRD grant of R370 per month introduced during Covid-19 and continued over the years to come to the rescue of the poor has been cancelled to assist the minister with a further R35 billion.

These austerity measures are critically needed to stabilise public finances amid rising debt and sluggish economic growth. The decision by the minister to halt the increase in VAT raises key questions, including why the minister reversed the decision, and how the R30 billion shortfall will be addressed.

What are the macroeconomic implications for inflation, interest rates, economic growth and employment? What are the reasons for the government's abandonment of the VAT increase?

With a considerable amount of political pressure and public backlash, potential cracks within the GNU, which backs the tax hike, are politically risky. VAT is a regressive tax, disproportionately affecting low-income households despite zero-rated essentials. Dozens of civil society groups and unions strongly opposed the hike, arguing it would deepen inequality.

The coalition dynamics, particularly between the ANC, DA, and IFP within the GNU partnership, require policy compromises. Both the IFP and the DA opposed the VAT increase from the time of the original budget speech. However, the Deputy Minister of Finance is a DA member, implying they would have known about the proposed increase before it was tabled in parliament.