Godongwana urged to cut spending over tax hikes amid economic crisis

As South Africa grapples with sluggish economic growth and an alarming rise in national debt, Finance Minister Enoch Godongwana is under increasing pressure to make a critical decision regarding the nation’s fiscal future.

With a staggering R60 billion budget shortfall looming, discussions around a potential increase to the Value-Added Tax (VAT) have become the focal point of ongoing debates among policymakers and economic experts.

Originally set to deliver the budget speech on February 19, Godongwana postponed the announcement, reflecting the nation’s uncertainty about the path ahead.

A proposed increase in VAT from 15% to 17% has met with significant opposition, with many stakeholders outright rejecting the plan.

Alternative suggestions on the table include a more modest VAT increase of 0.5%, paired with spending cuts on the R370 COVID-19 Social Relief of Distress (SRD) grant and the introduction of a wealth tax.

Additionally, there are proposals for a year-long “holiday” on pension contributions for government employees. However, the delicate balance of appeasing both fiscal demands and public expectations remains a formidable challenge.

According to South African Revenue Services (SARS) data, becoming a member of the top 1% of taxpayers, which consists of just over 100 000 individuals, requires an annual income of approximately R1.95 million.

Those classified as ultra-high net worth individuals must possess gross wealth exceeding R75 million.

Financial analysts warn that any additional taxation aimed at this small group could compel wealthy individuals to shift their assets abroad, exacerbating South Africa's already narrow tax base.

Riaan Grobler, head of advisory services at Everest Wealth, said Tuesday that taxpayers were overburdened and cannot continue to bear an ever-increasing tax burden.

Grobler said plans must be made to generate additional income from limited sources.

“It is clear that government spending cuts are now necessary, and the state will have to tighten its belt significantly. This means there must be a focus on the government’s wage bill and managing its unsustainable debt burden, which includes greater efficiency and reduced waste” . 

“The government’s ambitious plans to stabilize government debt does not seem to be materializing, while Godongwana is clearly looking at tax measures to collect billions of rands in additional revenue.” 

Godongwana’s ambition to stabilize government debt faces considerable headwinds. Recent projections reveal that national debt has ballooned to over 75% of gross domestic product (GDP), with interest payments consuming a staggering 22 cents of every rand collected in revenue.

Mzimasi Mabece, head of fixed income at Melville Douglas, the boutique fund manager for the Standard Bank Group, said the State must now explore alternative sources of revenue, given these challenges and the government's efforts to maximize tax revenue.

Mabece said with the VAT increase off the table, the government must consider other potential sources of tax revenue. 

“One option is a wealth tax, which could impact inflation, the tax base, economic growth, foreign direct investment, and capital flight. Before exploring these impacts, it is essential to define wealth tax,” Mabece said.

“New taxes aim to generate revenue for the state in the least disruptive and most effective manner. However, the solution to South Africa's debt crisis should focus on fostering economic growth and ensuring efficient spending on healthcare, education, and infrastructure. In the long run, these measures will support economic prosperity for all.” 

Advocates for social equity, including the Federation of Unions of South Africa (Fedusa), have vocally opposed any austerity measures that compromise essential public services.

Fedusa said any increase in VAT would deepen economic suffering, and any reduction in the SRD grant would push millions further into poverty. 

The trade union federation demanded the expansion of the SRD grant as a step towards a permanent Basic Income Grant, higher taxation on the wealthy and large corporations, and pro-poor fiscal measures that reduce the tax burden on struggling households.

“South Africa needs a budget that puts people before profits, strengthens public services, creates jobs, and ensures economic justice. Fedusa condemns the government’s failure to implement a fair tax system that ensures the wealthiest pay their fair share,” it said.

“Instead of punishing workers and the poor, the government must strengthen Sars' capacity to aggressively target tax evasion by the ultra-rich and big business, end illicit financial flows that rob South Africa of billions in lost revenue each year, and expand progressive tax policies that reduce the burden on low- and middle-income earners while holding corporate giants accountable.” 

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