KHAYA SITHOLE: VAT hike may come back to haunt GNU

After three weeks of negotiations regarding the fate of the nation’s public finances, finance minister Enoch Godongwana finally had to bite the bullet and administer bitter medicine to the nation.

In the initial version of the budget he justified his quest to raise VAT to 17% as a necessity to fund public-service wage increases and enable the government to balance its books. Mentioning public servants as the spending area requiring new revenue to be raised from additional tax would have been a sore point for those whose foothold in the economy and job markets is more fragile than the tenure of those on the state’s payroll.

In recent years the government’s need to placate unions representing discontented workers to avoid crippling strikes has resulted in the adoption of multiyear wage agreements that have become a further squeeze on the public purse — particularly as the wages grow at a faster rate than the growth in resources, whether measured through tax receipts or economic growth itself. 

A possible solution that has emerged is to encourage some public servants to exit early and to discourage expansion of the civil service by freezing posts. Yet critical front-line services in education, healthcare and border security are already short of critical manpower, and their inability to execute on their mandates has immediate and permanent consequences for the country.

An underresourced education system condemns a generation of young people to a lifetime of economic and skills servitude. Poorly managed borders escalate an existing public security crisis and create new social tension points among marginalised communities.

Wages albatross 

The sheer size of the state means the wage bill is a national albatross that — among other issues such as state-owned enterprise bailouts — was never going to be deferred forever. When he finally tabled the budget the minister indicated the recent agreement would cost even more than initially budgeted.

The gamble taken by the state — that natural attrition will eventually deliver a solution — underestimates the reality that migration out of the state payroll would be more attractive if the private sector was robust enough to offer opportunities. In a stagnant economy opportunities for migration are as bleak as the national budget itself. 

The high levels of unemployment and cost-of-living squeeze led to a universal objection to a VAT increase, but rather than concede on that front and look for something else altogether the minister took a decision that introduces new political and credibility risks for himself and the administration at large. The political risks hinge on the fact that far too many voting citizens are not only suffering from the great squeeze but also have to experience declining service delivery, and find the idea of paying more offensive. 

By persisting with a VAT increase of half a percentage point in each of the next two years the minister has put the ball in the court of the government led by his party to finally tackle the underlying cause of the national resource crisis. But the debate over taxes is a futile one if the foundation for all taxes — a robust and growing economy — is not in place. The lack of a national economic blueprint necessary to grow the current range of taxes is the binding problem statement of the parties in this government. 

In the absence of a fundamental turnaround in the economic foundation of the country all parties in the government of national unity (GNU) will be faced with a difficult year ahead of local government elections. The idea that those within the GNU can perpetually disown the budget while maintaining their participation in everything else it does creates a credibility problem.

Voters may well express happiness with other pronouncements in manifestos, but will always remember that when the financial squeeze was proposed none of the parties could ultimately stop it. 

• Sithole is an accountant, academic and activist.