Budget: VAT increase would be carried by the poorest of the poor in South Africa
The announcement of Finance Minister Enoch Godongwana’s postponement of the Budget Speech on Wednesday sent shockwaves throughout the nation.
This comes after a disagreement between parties within the Government of National Unity (GNU) on the proposals within the Budget.
The executive decided to adjourn and postpone the National Assembly’s sitting to allow enough time to reassess the Budget.It was announced that the Budget would take place on March 12.
Annabel Bishop, the chief economist at Investec, said, “Markets are still weighing up the implications of the delay in the Budget, with the reported issue revolving around a proposed 2% VAT increase, which some parties were not in agreement with, risking today’s Budget not being passed by Parliament.”
The rand had seen little impact so far at R18.45 against the dollar on Wednesday morning and was at R18.56 in afternoon trade, she said.
Lead economist at KPMG, Frank Blackmore, said, “Most of the market commentators did not foresee a VAT increase as part of this year’s Budget. From around Wednesday morning, the figure of 2% was being discussed, to most peoples’ disbelief.”
The disbelief was mostly due to the effects the VAT increase would have on the nations poor, which makes up the majority of the population in the country.
Blackmore said not only would it be highly inflationary, but also decrease the disposable incomes of individuals and be regressive, meaning the cost burden would be carried more by the poorer individuals in the country.
“The most alarming aspect of the whole issue was the uncertainty that this has provided into financial markets. We saw a reaction on the rand as well as the bond and equity markets that was negative at the time. One would have thought that even the GNU, with its constituent parties, would have had a strategic plan for the economy over the next three years that would have been debated and finalised before this Budget event took place, which was obviously not the case.
“As usual, uncertainty in markets leads to volatility and crisis and we have seen this in financial markets on Wednesday morning. I don’t think it is the end of the world, however, if the right outcome is arrived at at the Budget in March, with all parties satisfied with the Budget, the country will be better for it. It would have been good for us though, to have avoided this incident that played out,” Blackmore further added.
Jurgen Eckmann, a wealth manager at Consult by Momentum, said, “The postponement of today’s Budget initially came as a shock, and we quickly saw its immediate impact on markets and the exchange rate. Markets tend to 'spook' easily but it's important to remember that this volatility is generally temporary. While we may see some short-term sell-offs in the market, this should not be seen as an indicator of sustained or long-term negative sentiment.”
Eckmann further said, “On a broader level, there's also a shining silver lining: the strength of the GNU has been demonstrated, introducing more voices and perspectives into the decision-making process and ultimately promoting greater accountability. It is important to remember that this current uncertainty is temporary; when the Budget is finally tabled in March, we will hopefully see a stronger, more balanced Budget of consensus. This is a true demonstration of a democracy.”
Casey Sprake, an economist with Anchor Capital, said South Africa’s Budget statement 2025 now slated for March 12 will be eagerly awaited against the backdrop of “structural reforms are progressing” despite “logistical bottlenecks persisting” amid operational improvements becoming increasingly evident". This was, however, being overshadowed by external volatility and the threat of a bloated fall-out with the US after President Donald Trump moved to cut aid to South Africa.
John Steenhuisen, leader of the DA said on Wednesday that the postponement of the Minister of Finance’s 2025/26 Budget Speech due to the DA’s opposition to the ANC’s VAT increase was “a victory for the people of South Africa, as it prevents the implementation of a 2% VAT increase that would have broken the back of our economy”.
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