The National Treasury has finally withdrawn the proposed 1% point VAT hike following weeks of pressure from across the political spectrum. We welcome this, noting that VAT is a regressive tax and would have harmed the working class despite proposed measures to cushion the blow. However, we reject the intention to reintroduce spending cuts in response. Instead, the AIDC calls for the implementation of progressive tax and revenue-raising options and increased expenditure to address the multiple crises our people face.
In their statement on the reversal of the VAT hike, the Treasury states:
Parliament will be requested to adjust expenditure in a manner that ensures that the loss of revenue does not harm South Africa’s fiscal sustainability.
Put simply, Treasury is saying that if parliament doesn’t want this budget, then they need to decide where to cut spending in order to balance the books, prioritising debt repayments.
Would they consider other revenue alternatives? According to the statement, not for now:
There are many suggestions, however, some of them would create greater negative consequences for growth and employment and some of them, while worthwhile, would not provide an immediate avenue for further revenue in the short term to replace a VAT increase.
The implication is clear. If South Africans do not want a VAT hike, we must be prepared for spending cuts. But we cannot afford austerity in any form. The programme of budget cuts implemented since 2020 has crippled public services. Doctors, nurses, and teachers are increasingly overworked due to hiring freezes in most departments, while experienced staff are being replaced with casual workers in order to save on the government’s wage bill. Clinics and schools are short on essential supplies, with managers needing to make trade-offs between restocking supplies, paying staff, or doing basic maintenance. This, while unemployment hovers at 32% (40% if including discouraged work seekers).
Further, if measures such as increases to social grants or subsidies to Early Childhood Development centres are cut, this will have an even greater impact on the poorest South Africans than the proposed VAT hike. Let us be clear: replacing a VAT increase with budget cuts is not a victory for unemployed and working-class South Africans but a defeat.
There is no need for budget cuts to balance the budget. According to the March budget, the VAT increase was supposed to bring in R11.5 billion this year, when including the cost of zero-rating. This month, SARS announced that they had collected R8.8 billion more in tax than what was expected in the budget. This means that the real shortfall is only R2.7 billion this year.
This is not a difficult shortfall to cover. Currently, South Africans can deduct a small part of their payments for medical aid from their tax bill. Cancelling this tax credit just for rich South Africans earning more than a million Rand per year would bring in R3.4 billion – more than enough to meet the shortfall!
There are several short-term and long-term alternatives to increase revenue without resorting to VAT or budget cuts.
Measures that can be implemented immediately to prevent any budget cuts for the 2025/2026 budget:
- Cancellation of the medical aid tax credits that disproportionately benefit high-income earners. Cancelling this only for those earning more than R1 million a year would cover the current shortfall by bringing in R3.4 billion. Cancelling this for all would bring in an additional R30 billion in revenue every year.
- A pause in the government’s contributions to the GEPF. The GEPF had a surplus of R60 billion in 2024 and will still have a surplus and continue to grow even with a pause in government contributions. Workers pensions will not be at risk and the state could save R53 billion in 2025.
Progressive medium to long-term measures to raise more revenue:
- A net wealth tax of 1% on the top 1% and 3% on the top 0.1% would raise revenue of R59 billion per year (IEJ, 2021).
- Further non-adjustment of personal income tax brackets for high earners in 2026/27 and 2027/28 could bring in an additional R60 billion over the next three years.
- Such a policy would also be effective in restoring the revenue-raising capacity of personal income tax by bringing effective tax rates back in line with what they once were pre-2000.
- SARS has reported that there is up to R800 billion in tax that is not being collected, due to tax evasion, the lack of capacity within SARS, or other factors. Capacitating SARS will enable them to close this gap. Additional funding to SARS last year resulted in extra revenue that was 60 times the amount of the additional funding.
- Stronger measures to curb tax evasion and illicit financial flows by multinational companies and the ultra-rich could bring in anywhere between R28 billion – R100 billion.
However, in the long run, these measures need to go beyond supporting the status quo. South Africa has a stagnant economy with the highest unemployment and highest inequality in the world. The legacy of Apartheid runs through our cities, townships, and neglected rural areas. We urgently need a long-term growth, development, and low-carbon, wage-led re-industrialisation strategy driven by public investment in meeting basic needs. This will require a fundamental shift away from the neoliberal obsession with shrinking the role of the state.
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This statement is issued on behalf of the following organisations: Alternative Information and Development Centre (AIDC), Amadiba Crisis Committee (ACC), Back 2 Work Campaign, Botshabelo Unemployed Movement (BUM), Cry of the Xcluded (CryX), PE Amandla, South African Green Revolutionary Council (SAGRC) and the Unemployed Peoples’ Movement (UPM)
For more information, contact:
Aliya Chikte (AIDC) on 082 695 5659
Jaco Oelofsen (AIDC) on 084 376 9019
Nonhle Mbuthuma (ACC) on 073 426 2955
Matthews Hlabane (SAGRC) on 082 707 9860
Mikel Kumalo (Back 2 Work Campaign) on 065 021 5329
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