1% VAT hike likely after grant extension: economists
President Cyril Ramaphosa’s decision to extend the R350 social relief of distress grant and introduce a long-term basic income grant could imply a VAT hike for South Africa next year, says Jeff Schultz, senior economist at BNP Paribas South Africa.
BNP Paribas forecasts that the one-year extension of the grant will cost between 0.5-0.7% of GDP – a figure previously placed at around R35 billion.
Schultz said he expects the government to focus on planning a sustainable replacement for the R350 grant over the coming year, with an implied 1% increase in VAT in 2023.
“The fiscal numbers for the extension are already incorporated in our baseline for the main budget deficit to narrow to 4.8% of GDP in FY22/23 – incidentally a lower deficit ratio than before the Covid pandemic.”
While a VAT hike could help fund a permanent income grant for South Africa, finance minister Enoch Godogwana is also expected to provide details on how the extended R350 grant will be funded in his budget speech on 24 February, says Peter Attard Montalto, head of capital markets research at Intellidex.
“There was no announcement of a basic income grant (in Thursday’s State of the Nation Address) yet the need for support and the path towards one was clear. The fiscal situation was clearly laid out though conflicted with more spending hinted at elsewhere.
“The president is very clear in the broad context of the speech, (that) the need for sacrifices to deal with South Africa’s problems, the unsustainability of the problems like inequality, unemployment and poverty – that more support was needed.”
Montalto added that there appears to be a disagreement on this issue with the National Treasury.
“Indeed, Godongwana was combative after (the SONA) in interviews, and when asked where the money would come said (that) if the president had announced something, then the president must know where the money was.”
Read: Ramaphosa announces extension of R350 social relief grant – with plans for basic income
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