{"id":814711,"date":"2025-02-28T12:29:53","date_gmt":"2025-02-28T10:29:53","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=814711"},"modified":"2025-02-28T12:36:13","modified_gmt":"2025-02-28T10:36:13","slug":"south-africas-massive-tax-hike-fail","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/finance\/814711\/south-africas-massive-tax-hike-fail\/","title":{"rendered":"South Africa’s tax hike backfire"},"content":{"rendered":"\n

Economists say South Africa’s shelved 2025 Budget, which hoped to raise R60 billion-plus in taxes from a VAT hike, may have been doomed from the start.<\/p>\n\n\n\n

Data compiled by Alexforbes chief economist Mpho Molopyane shows that over the past 10 years, the government’s projected revenue has always been overestimated, resulting in shortfalls when reality catches up.<\/p>\n\n\n\n

This is especially pronounced in years when taxes were hiked\u2014including the last time VAT was hiked to 15% which resulted in one of the biggest shortfalls in the last decade.<\/p>\n\n\n\n

Following the Government of National Unity’s (GNU) decision to withdraw the ‘draft’ 2025 Budget, the embargo on its contents was lifted, giving experts ample time to analyze how National Treasury’s Plan A would have affected South Africa.<\/p>\n\n\n\n

The key point of contention in the budget was the National Treasury’s plan to hike the VAT rate to 17%, which GNU partners were vehemently against, causing the delay.<\/p>\n\n\n\n

Some economists, such as those at the Bureau for Economic Research<\/strong><\/a>, have already flagged how the proposed VAT hike would have pushed up consumer inflation and hit interest rates.<\/p>\n\n\n\n

However, Molopyane’s data shows that the government’s ambitions regarding the hike were likely overinflated and overstated from the outset.<\/p>\n\n\n\n

“Barring 2021\/22 and 2022\/23\u2014during the post-Covid commodities boom\u2014revenue outcomes have generally come in lower than initially projected<\/strong> over the past 10 years,” she said.<\/p>\n\n\n\n

“More concerning is that the revenue shortfall tends to be larger during periods where there are substantial tax increases<\/strong>.”<\/p>\n\n\n\n

The economist pointed to numbers in 2017\/18 when the National Treasury introduced a 45% top income bracket to shave more off the top from the wealthy. The result was a R49 billion shortfall.<\/p>\n\n\n\n

This happened again in 2018\/19 when VAT was last hiked to 15%, where the shortfall was even bigger, at R57 billion.<\/p>\n\n\n\n

These were two of the biggest shortfalls (outside of Covid) in the past decade. Simply put, history tells us that these tax hikes simply don’t have the intended effect. <\/p>\n\n\n\n

This has been expressed time and time again: South Africans are overtaxed and cannot be squeezed any further without collections going the other way.<\/p>\n\n\n\n

“Overall, this points to overestimation bias and raises concerns over fiscal consolidation credibility,” Molopyane said.<\/p>\n\n\n

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\"\"<\/a><\/figure><\/div>\n\n\n

Ballooning spending<\/h2>\n\n\n\n

While the government tends to overestimate the revenue side of the equation, it also underestimates the expenditure side.<\/p>\n\n\n\n

Molopyane noted that the proposed VAT hike was to fund above-inflation increases in government wages, social grants and frontline services.<\/p>\n\n\n\n

However, there are huge risks that these costs would also balloon.<\/p>\n\n\n\n

On paper, the main budget revenue was projected to be higher by R182 billion and expenditure by R145 billion relative to the 2024 MTBPS. <\/p>\n\n\n\n

This would have resulted in a slight improvement in the main budget deficit, which was now projected to narrow to 3.2% of GDP in the 2027\/28 financial versus the 3.4% MTBPS estimate.<\/p>\n\n\n\n

In reality, this doesn’t take into account risks like the High Court ruling that the R370 SRD grant should be expanded in both qualifying persons and the amount.<\/p>\n\n\n\n

There are also concerns that higher education funding for the poor and the missing-middle remains inadequate, with more funding also likely to be required for the National Health Insurance (NHI).<\/p>\n\n\n\n

Molopyane said additional funds would also be required should the United States Agency for International Development (USAID) ‘s funding for the President’s Emergency Plan for AIDS Relief (PEPFAR) be permanently suspended.<\/p>\n\n\n\n

Conservatively, these risks would add R100 billion to the expenditure side of the budget, moving the balance in the wrong direction.<\/p>\n\n\n\n

A new budget is being drafted and set to be tabled on 12 March 2025.<\/p>\n\n\n\n

Molopyane said the final result is unclear at this stage, but it is clear that the National Treasury is firmly “in a realm of difficult choices.”<\/p>\n\n\n\n

“It is unclear how they will walk back some of the proposed spending, such as higher wages and additional funding for front-line departments aimed at building a capable state, or how they will raise additional revenue as a VAT increase seems unpalatable,” she said.<\/p>\n\n\n\n

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Alexforbes chief economist, Mpho Molopyane<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"

The government’s big plans to raise revenue by hiking VAT to 17% may have been doomed from the start, if history has anything to show for it.<\/p>\n","protected":false},"author":10,"featured_media":812932,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11121],"tags":[16778,21583,17448],"class_list":["post-814711","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-alexforbes","tag-budget-2025","tag-enoch-godongwana"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/814711","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=814711"}],"version-history":[{"count":5,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/814711\/revisions"}],"predecessor-version":[{"id":814729,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/814711\/revisions\/814729"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/812932"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=814711"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=814711"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=814711"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}