By Thapelo Molefe
The Institute for Economic Justice (IEJ) has slammed the National Treasury’s approach to fiscal policy, calling it “the worst of both worlds” for cutting spending on critical services while imposing tax increases that burden the poor.
“This road-to-nowhere sought to limit further egregious budget cuts through the unpalatable proposal of increasing taxes on the poorest,” the IEJ stated in response to the government’s decision to delay the Budget announcement.
The South African government’s unprecedented decision to postpone its national Budget Presentation to 12 March has sparked a mixed reaction from economic policy experts and civil society.
While the move temporarily halts a controversial 2 percentage point increase in VAT, the IEJ warns that the delay alone is not enough to address the deeper issues plaguing the country’s fiscal strategy.
“We are disappointed that the National Treasury prepared a budget that failed to adequately resource government priorities in the Medium-Term Development Plan. However, we are relieved that sanity has prevailed, and the regressive VAT increase of 2 percentage points has seemingly been put on hold,” the IEJ stated in a statement.
The proposed Budget had included a VAT hike from 15% to 17%, along with partial inflationary adjustments to personal income tax brackets and other measures.
The IEJ strongly opposed the VAT increase, emphasising that consumption taxes would disproportionately harm low-income South Africans.
“VAT is the least desirable option as it disproportionately impacts poor and low-income households, in an environment where these households are already suffering under high interest rates, poor public service provision, and endemic poverty,” the statement noted.
The institute also pointed to historical evidence that the last VAT increase in 2018/19 failed to generate the expected revenue.
“In the first year of the previous VAT increase, National Treasury had predicted a VAT collection of R348 billion, yet SARS (SA Revenue Service) only managed to collect R325 billion, around R22 billion less than expected,” the IEJ highlighted.
Given the country’s fragile economic situation, the organisation warned that a further increase could depress consumer spending and economic activity.
Instead of increasing VAT, the IEJ proposed several alternative measures to raise revenue in a more progressive manner.
“Assertions that personal and corporate income tax have reached their limits have not been substantiated,” the statement asserted.
Among the alternatives suggested were raising the Corporate Income Tax rate back to 28%, reversing a previous cut that failed to attract investment, and removing tax breaks for high-income earners, such as those linked to pensions or medical aid contributions.
The IEJ also proposed scrapping ineffective corporate tax incentives, such as the Employment Tax Incentive, and more effectively taxing wealth and capital through inheritance taxes and financial transaction levies.
Additionally, it recommended raising personal income tax rates, particularly on the highest earners, or implementing a progressive Social Security Tax. Another option put forward was leveraging additional revenue from the Gold and Foreign Exchange Reserve Account, which has previously been used as an unconventional financing mechanism.
The IEJ called on the government to engage in an inclusive dialogue over the next few weeks to explore these alternatives.
“The next few weeks present an opportunity for civil society to put forward an alternative human rights-centred budget that can grow our economy and centre the needs of our people,” the institute said.
Beyond fiscal concerns, the IEJ argued that the current budget crisis was symptomatic of broader policy failures within the National Treasury.
It criticised the Treasury for failing to provide a “robust positive vision for the transformative potential of public spending”, instead presenting a strategy that the IEJ said limited the state’s ability to drive economic development.
As the government prepares to present a revised Budget in March, pressure is mounting for a fiscal policy that not only avoids regressive taxation but also ensures sufficient funding for social services and economic development.
“For this, we need a National Treasury that embraces the positive potential of a developmental fiscal policy, not one that is ideologically committed to shrinking the role of the state,” the IEJ concluded.
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