Budget 2021

Is it time to raise the VAT rate?


Cape Town – A 2% increase in VAT could provide the cash needed to avoid fiscal slippage, says an expert.

The budget which will be delivered on February 21, will have to indicate how government plans to reduce the current deficit and reduce borrowing, especially considering tax revenues are expected to be R50bn lower than anticipated.

Tsitsi Hatendi-Matika, head retail investment specialist at ABSA’s wealth and investment management division, suggested that Treasury may have to look at adjusting VAT to provide the necessary funds.

An alternative would be to add VAT to fuel. “We anticipate that this could raise up to R18bn,” she said.

But this will increase the retail price in fuel, unless the general fuel levy is cut. “National Treasury would need to get creative around this for it to be palatable for consumers.”

Even though an increase in VAT would add a “substantial amount” to tax revenues, it will increase the tax burden across all income bands, said Investec Chief Economist Annabel Bishop. “Particularly for the poor whose expenditure on travel already makes up a very large part of their monthly expenditure,” she said.

Managing expenditure

The finance minister will have to indicate how expenses such as free tertiary education will be funded, explained Hatendi-Matika. “It is estimated that up to R60bn would be necessary to allow for free tertiary education.”

There should also be more clarity on the funding of state-owned enterprises, namely Eskom, South African Airways and the Post Office.

“Close to R35bn is required in bailouts, with Eskom taking up around R20bn of this amount.

“The SOCs (state-owned companies) have put a major strain on contingent liabilities, as the government continues to give guarantees when these entities borrow,” she said.

Hatenda-Matika noted that ratings agencies have raised concerns over contingent liabilities for SOEs. 

In a statement following the election of President Cyril Ramaphosa, ratings agency Moody’s said it would be watching how the new leadership addresses economic and fiscal challenges. S&P believes that the new leadership could implement reforms faster.

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