Tax hikes expected next week – including VAT

South Africa’s cabinet will back a value-added tax increase in exchange for a commitment from the National Treasury to review spending and fast-track economic growth, according to people familiar with the discussions.

The Treasury is likely to opt for a smaller 0.5 percentage point hike in a rescheduled budget to be presented on Wednesday, compared with its initially proposed 2 percentage-point increase, according to two of the people, who asked not to be identified as the information isn’t public.

That option would resolve an impasse within the coalition government over the planned VAT hike that caused an unprecedented postponement of the budget last month. The original proposal to lift the VAT rate to 17% would have raised R191 billion over the next three fiscal years.

The go-ahead to raise the VAT rate is conditional on the Treasury making headway on critical issues including fixing the nation’s ailing ports and undertaking a spending review, the people said.

South Africa wants to boost economic growth and invest in frayed infrastructure while also controlling borrowing, limiting its options.

Among other options available to the Treasury to boost revenue are lifting taxes on alcohol and the fuel levy, the people said.

The smaller VAT increase would also mean the Treasury would have to cut back on spending plans proposed last month, which included an additional allocation of R46.7 billion to fix South Africa’s frayed infrastructure, they said.

The cabinet has had no choice but to broker a deal, the African National Congress’ newly appointed economic czar, Zuko Godlimpi, told Bloomberg on Friday.

“We need to find a viable tax policy adjustment that can cover the medium-term, whatever shape or form it takes will depend on what the minister of finance says, but it must be broad enough and less punitive to those who need it the most,” Godlimpi said.

He said he has no knowledge of the planned tax increase, which is up to Finance Minister Enoch Godongwana.

The budget speech was postponed on Feb. 19 after the Democratic Alliance, the second-biggest party in the ruling coalition, and even members of the ANC opposed the initially proposed VAT hike.

Those who rejected the increase have had to walk back their earlier position, Godlimpi said.

“It is unfortunate that a lot of pronouncements have been made in the media because that undercuts what kind of deal you can arrive at,” he said.

“But we do need a deal, a deal that can work for all South Africans, that deal must be such that the budget review process gives us, in part, a growth ignition expenditure framework as well.”