Cape Town – President Cyril Ramaphosa has intervened in a heated debate over a proposed VAT increase, tabling a compromise during a recent Cabinet meeting as Finance Minister Enoch Godongwana grapples with a looming budget shortfall.
Government sources indicate that Ramaphosa suggested a more moderate VAT increase of between 0.5 and one percentage point, a significant departure from Godongwana's original plan. This intervention followed Godongwana's stark presentation to Cabinet, outlining the dire consequences of failing to address a R60 billion budget gap.
Godongwana had intended to use the VAT increase to fund critical initiatives, including pay raises for civil servants, infrastructure improvements for passenger trains, the retention of teaching posts, the appointment of additional pre-school teachers, and the financing of social grants. He reportedly warned Cabinet colleagues that key projects would be halted or severely impacted without the additional revenue.
A particularly contentious point was the future of the special Covid-19 grant of R350, a lifeline for many vulnerable South Africans. Godongwana reportedly stated that the grant's extension until March 2026, requiring an additional R35.2 billion, would be impossible without a VAT increase. The ANC had repeatedly championed the extension of this grant during its election campaign.
Furthermore, Godongwana highlighted the potential negative impact on teacher appointments, school feeding programmes, and the government's early childhood development programme. This grim assessment prompted Ramaphosa to propose his compromise solution.
Another alternative considered was the introduction of a wealth tax. However, critics cautioned that this could backfire by incentivising wealthy taxpayers to relocate to more tax-friendly countries, further shrinking South Africa's already limited tax base. Currently, a mere 1.5% of the population (978,140 South Africans) contributes 60.9% of all personal income tax, while just 0.34% (235,542 South Africans) pay 33%.
The Democratic Alliance (DA), a key partner in the GNU, has presented an alternative budget proposal to Godongwana, advocating for strict austerity measures instead of tax increases. The DA's plan includes cuts to government advertising, reduced spending on travel and catering across state departments, and a freeze on non-essential recruitment in the civil service. The DA claims these measures would generate the R60 billion sought by Godongwana.
With the budget speech postponed until 12 March, negotiations are set to continue, leaving the country waiting to see how the GNU will navigate this critical fiscal challenge.