Value Added Tax (VAT) began as General Sales Tax (GST) under the apartheid regime to cope with the crisis of falling state revenues and as a result of the anti-apartheid sanctions campaign. The apartheid economy was by design intended to service a white minority and to exclude the black majority.
After 1994, VAT was sustained with little consideration of its impact on the newly politically liberated majority. No consideration has ever been given for the need to design new emancipatory tax policies to suit the new post-apartheid order. That we have sustained more than a decade of economic stagnation should alert policy-makers that the old economic paradigm is no longer viable and no amount of tax increases can revitalise it.
As things stand South Africa’s GDP per capita has over the years shown no dramatic change. In 1995, it was about US$3 904 per capita, and today, it stands at about US$6 253. If from 1994 SA had adopted the NDP with its growth targets of 7-8% annually, GDP rate would have more or less doubled every decade to reach a level of more than US$30 000 today. The challenge, however, is to design requisite policies to guide decisions for investment, taxation, and budgeting to accelerate economic transformation. Are existing policies up to the task?
In his latest Budget 2025 speech presented to parliament, Minister of Finance, Mr Enoch Godongwana, had this to say:
“Madam Speaker, There are several persistent spending pressures in health, education, transport, and security. These have to do with the government properly fulfilling its service delivery mandate. After careful consideration, the government has decided to fund these. Deferring the funding of these sectors further would compromise the government’s ability to meet its constitutional obligations to the people. To raise the revenue needed, the government proposes to increase the VAT rate by half- a percentage point in 2025/26, and by another half-a-percentage point in the following year. This will bring the VAT rate to 16 per cent in 2026/27.”
The Minister’s budget speech has triggered a controversy over whether or not to raise VAT by how much and over what period of time. The current budget plan is primarily aimed at meeting ‘service delivery’ requirements. Achieving economic transformation and growth objectives, including transfer of economic power to the oppressed majority, is a secondary consideration. The Minister also remains vague regarding targeted rates of economic growth but merely acknowledges that:
“In 2024, the economy grew by only 0.6 percent. Over the medium term, GDP growth is projected to average 1.8 percent.”
If these rates of economic growth do not change for the better over a sustained period we can expect the size of the South African economy to double in size in about 35(1.8%) to 110 years (0,6%). Assuming a population fertility rate of 1.5 (StatsSA), we can expect the same economy we have today to accommodate the needs of almost twice the current population of 60 million in the future. Obviously, under these conditions, poverty will be rife, and life will be much harsher. The Minister refers to “stagnation over the past decade” which is the first stage of this long-term economic collapse if there is no change in thinking to fashion tax and budgeting policies for a planned economy to achieve higher growth rates.
A new and different way of economic thinking is required to direct the economy to achieve peak levels of growth. In the NDP 2014-2030, it is stated explicitly that a desirable growth rate is anything around 7 – 8% of GDP annually. This is a reasonable goal for budgeting and tax and budgeting policy development. At these NDP rates of growth, the economy is expected to double in size every decade, exactly what is needed to cope with population growth pressures. It remains a big mystery why the Minister chose not to use the NDP targets as a guideline for the design of requisite tax and budgeting policies. Minister Godongwana informed his audience that tax collection rates currently stand at about 25% of GDP and that some R800 billion is not collected each year. From this, it looks like tax revenue collection could be doubled without raising VAT, but administrative inefficiencies remain a major stumbling block.
Secular stagnation of the South African economy is rooted in apartheid society but the latest phase is traceable to the 2008 Global Financial Crisis when credit finance for new and established business suddenly dried up and has never fully recovered since. Secondly, the budgeting framework in South Africa is driven by spending for ‘service delivery’ rather than investment to grow a productive economy. Above all, there is hardly any consideration for upgrading the policy system to utilise instruments such as credit guarantees to encourage investors to release funds for productive sectors such as agriculture, mining, manufacturing, construction, and so on. In the absence of state sponsored credit guarantees, banks are extremely averse to lending to SMEs that some believe are the backbone of new job creation, especially if they involve black entrepreneurs.
It is desirable to have a combination of efficient tax collection to boost revenues alongside tax reforms to reduce VAT and the overall tax burden on workers. Incentives and tax credits to stimulate diverse forms of ownership and control, such as cooperatives and mutuals, have never been given consideration.
There are no attempts to use the budget to promote regional development using tax incentives, perhaps because powerful interests stand in the way of such reforms. It is obvious that there are efforts by SA’s capitalist monopolies to defend the current economic paradigm.
