Last week, Malusi Gigaba, now the former minister of finance, presented a problematic budget. With national debt increasing (to over R2.5 trillion this year), the national Treasury, as guardian of the publicâ€™s purse, is understandably concerned, writes MANZA MUSA.
Government proposed cutting expenditure by R23.7 billion, and increasing revenue by R96.1 billion over the next three years, to reduce the budget deficit and slow down the increase in public debt. The central, and most controversial, proposal is the increase in value-added tax (VAT) by 1 percentage point to 15% to raise an additional R22.9 billion this year. A 1 percentage point increase in VAT will increase the price of a R100 product to R100.88.
Why is this a hard move?
VAT is a â€œregressive taxâ€, as poor households spend most of their income, they pay a larger share of their income in VAT compared with wealthier households, which tend to save and invest a significant share of their income. A 1 percentage point increase in VAT will therefore hurt poorer households more than wealthier households. Government conceded this reality, and responded that the current provision of 0% VAT on certain goods consumed by the poor, as well as more generous increases to social grants, will cushion some of the impact of an increase in VAT.
Whilst these measures are likely to reduce the harmful effects of a VAT increase on poor households, they are insufficient to fully-mitigate the harmful effects. At present the goods exempt from VAT such as rice, brown bread, maize meal, milk, samp, and vegetables, account for no more than 20% of spending by low-income households. This means that low-income households will still have to pay 15% VAT on more than 80% of goods consumed.
Does increasing social grants protect the poor from VAT increases?
Governmentâ€™s second response to cushion the impact of higher VAT is to increase the value of social grants by more than inflation. The proposed increases in social grants such as old-age pension, disability, and child-support grants exceed the estimate of inflation, and would be sufficient to absorb higher prices from higher VAT. At present 17.4 million persons – 31% of the population – receive social grants every month. For poor households, social grants make up more than half their income, and are the main form of income for almost a quarter of all households. For this part of the population, above-inflation increases will cushion the VAT hike. However, there are many other poor households without access to social grants or any other adequate form of income. It is this segment of the population that will be hit hardest by the VAT increase.
The proposal to increase VAT is a regressive one within an overall tax system that is generally progressive â€“ the wealthier you are, the higher your tax rate and the more you pay. Increasing VAT is one of several proposals, affecting different segments of the population, in a very difficult economic environment.
A society is judged by how it treats its most vulnerable and the proposal to increase VAT shows a sensitivity to the plight of the vulnerable, however the measures proposed to protect the vulnerable are inadequate.
Manza Musa is a rebel economist.
The views expressed in this article are the authorâ€™s own and do not necessarily reflect the editorial policies of The Daily Vox.