In 2018, the poorest 10% of households experienced a decline of over 6% in their post-fiscal income after VAT was increased by 1%. Photographer: Armand Hough / Independent Newspapers.
The postponement of Finance Minister Enoch Godongwana’s Budget Speech this past week left the nation in a state of shock, especially after it came to light that the government had planned on increasing Value Added Tax (VAT).
The speculation about a possible VAT increase raised alarm bells for millions of South Africans already battling the cost-of-living crisis
Neil Roets, the CEO of Debt Rescue, told Business Report that higher taxes on everyday essentials would be devastating.
“A VAT hike in the current economic climate would be catastrophic. Consumers are already drowning in debt and struggling to afford essentials such as food, transport, and electricity. Increasing VAT would push consumers into even further financial distress,” Roets said.
A VAT increase will be harsh on lower-income households, who already spend most of their earnings on basic necessities.
“This will be heavy on the poor. Not only will it reduce their spending power, but it will also lead to higher inflation and force interest rates to stay high for longer, making it even harder for struggling consumers to stay afloat,” Roets added.
Unlike income tax, which is adjusted based on earnings, VAT is a regressive tax that affects all consumers equally.
With food prices already soaring, an increase in VAT would further erode purchasing power, leaving families with even fewer options to manage their expenses.
Roets added that at Debt Rescue, the surge in over-indebted consumers is reaching record highs.
“We’re seeing more South Africans relying on credit just to survive. A VAT increase could drive thousands into an even deeper debt spiral faster. The postponement of the budget speech offers a glimmer of hope. The delay suggests that government is taking a hard look at the impact this would have on consumers and exploring alternative solutions,” Roets further said.
“The way I see it, the government has just two options to manage the budget. Cut state spending and put measures in place to grow the economy. South Africans cannot be expected to shoulder the burden of a mismanaged budget,” he said.
Roets said that while the final decision remains uncertain, one thing is clear, consumers cannot afford additional financial strain.
Meanwhile, Brina Biggs, a senior manager at Budget Insurance, said that a 1% VAT increase, like the one implemented in 2018, may seem modest, but its effects are significant.
“In 2018, the poorest 10% of households experienced a decline of over 6% in their post-fiscal income. The poorest households, who spend a larger portion of their income on essential goods and services, are disproportionately affected. So imagine the impact of a 2% hike with no further reform. Furthermore, fuel and electricity price hikes compound the burden on households. Higher transportation costs, increased food prices, and reduced disposable income all take a toll,” Biggs told Business Report.
“To mitigate these effects, we urge policymakers to consider zero-rating essential goods and services, increasing social grant expenditures, and implementing targeted benefits for low-income households. As we move forward, it's crucial that we prioritise the most vulnerable members of our society. We must work together to ensure that economic policies benefit all South Africans, not just a select few,” she further said.
Hayley Parry, a money coach and facilitator at 1Life’s Truth About Money, said the proposed 2% increase would just be another factor that will continue to erode consumers cash flow.
Parry said, “Those who have a low income are spending a greater portion of their incomes on food, as an example, that 2% increase is material, you then add in other factors like for example the big increase coming in in electricity prices as well as rising the fuel costs. My concern is that this means more people will be tuning to credit it in order to make it through until their next pay day.”
“That's the last thing we want we want consumers to do, making sure that they can manage their expenses from pay day to pay day without needing to lean on credit,” she further said.
BUSINESS REPORT