Finance Minister Malusi Gigaba confirmed on Wednesday the almost unanimous prediction of the pundits: VAT will be increased by one percentage point to plug a growing hole in the budget. Gigaba spent a substantial portion of his speech justifying that decision: SA has not "adjusted" VAT since 1993; it is low compared to "some of our peers".
The government had increased personal income tax significantly in recent years and SA’s corporate tax rate is high by international standards. It was a game effort, but it does not obscure the brute fact that the ANC has crossed a Rubicon.
Until this week, increasing VAT was the untouchable topic and undoable thing, the holy of holies. The reason often and correctly cited is that increasing VAT is regressive. Obviously, most of it is paid by the middle class in absolute terms, as Gigaba pointed out, but that is not the point. As a proportion of the respective incomes of people in different tax brackets, a VAT increase is almost the polar opposite of a wealth tax. As a tax tool, it’s a blunt instrument, comparatively speaking. It also tends to suppress the retail trade. SA is a very retail-rooted economy: when the retail trade does well, the economy tends to do well. The VAT increase will put a damper on that at precisely the time the economy would relish an expansionary budget.
Gigaba essentially increased VAT not for any of the motivations given, although they were the proximate cause. Gigaba did so for a much simpler reason: he was forced to. The ANC has run out of road. He deserves credit for grasping the nettle; he deserves approbation for being in a position of having to grasp it.
The larger question is: why? How did SA get into this predicament of having to implement a contractionary budget at a fragile time, when our economic growth is just showing signs of picking up? Essentially, the ANC made a concatenation of poor economic decisions and South Africans, rich and poor, are going to pay for them. The first problem was consistently overestimating SA’s economic growth potential. For six of the eight years of the Jacob Zuma administration, the economic growth predicted at budget time was not achieved. This meant the government was planning for levels of expenditure higher than it would have been able to afford.
If that were the only problem, it would have been fairly easy to digest. Government budgeting has usually been conservative, and for years revenue collection has outperformed budget expectations, as the South African economy has solidified following the disastrous and chaotic apartheid years. However, it was compounded by several related problems. The first was a large-scale infrastructure programme that was so badly handled that it became not a boost, but an impediment. Second, the government kept on granting a fast-growing body of public servants huge salary increases, so that now public servants in almost all categories, easily out-earn their private-sector counterparts.
And, on top of all that, there was corruption. Nobody knows exactly how much corruption cost, or even how to distinguish between corruption and such poor administration that it counts as corruption. What is measurable is private-sector confidence, which collapsed as the mood soured, caused largely by a crooked administration and a sense of decline.
There was more to this budget, of course. Tertiary students have won an enormous victory, although it comes at a heavy cost to society, rich and poor. The positive side of the VAT increase is that government finances do look better, and there is now at least a racing chance that SA might escape a full downgrade by ratings agencies. Encouragingly, the idea of selling equity stakes in state-owned enterprises is now stated openly, rather than hinted at.
There is a lot of talk about a new dawn, and there is a good chance it’s true. Global growth is preposterously good, and it seems impossible that SA could not be lifted by this tide. But the budget is a cold shower, which demonstrates the enormous dimensions of the task ahead.