Major uncertainty continued this past week concerning Finance Minister Enoch Godongwana's Budget Speech with a focus on the Value Added Tax increase proposal.
This comes after the fragility of the Government of National Unity (GNU) was laid bare for all to see on Wednesday this past week where Members of Parliament (MPs) voted in favour of passing the National Budget with a slight margin in a protracted vote as 194 supported the fiscal framework with the proposed 0.5% increase in the value-added tax (VAT) while 182 opposed it.
While many may think that the Budget has been approved and passed, the process has still not concluded with MPs been given a 30-day period in which they will further debate outstanding issues about the VAT increase, with a big push for its total scrapping.
The two largest parties in the ruling coalition have been negotiating for weeks to reach an agreement on the contested budget.
The Democratic Alliance (DA) said it will be filing papers in the Western Cape High Court to challenge Parliament’s passing of the 2025/26 National Budget, saying it was both unlawful and unconstitutional how Parliament processed the Budget.
DA leader John Steenhuisen said the party had vehemently opposed the Finance Minister Enoch Godongwana’s Budget proposal, saying it had negotiated for amendments that would have ensured economic growth and job-creation.
“Instead of the budget being amended to address the needs of struggling South Africans, the budget has been passed by the National Assembly with VAT hikes to make life more expensive for South Africans,” Steenhuisen said.
ECONOMIC IMPLICATIONS
Investor sentiment immediately after proceedings on Wednesday was evident as the rand depreciated further by more than 1.6% to R18.78 to the US dollar by 7pm on Wednesday night, a fresh low since February 28.
Investec chief economist, Annabel Bishop, said the rand has weakened on the difficulty of various political parties to find each other over approving South Africa’s budget.
“The rand has reacted however to the increased political noise in SA around the budget, at R18.63/$1, weakening from R18.09/$1 in the second half of March, as some fears have arisen around the stability of the Government of National Unity,” Bishop said.
Frank Blackmore, lead economist at KPMG told Business Report that the passing of the fiscal framework without additional pro-growth, reduced expenditure or neutral tax amendments provided a more negative market signal when compared to the more pro-growth proposals made by various parties in the lead up to the vote on Wednesday.
"The political maneuverings that sidelined the second largest party of the GNU and resulted to the passing of the vote added to the uncertainty surrounding the future stability and potential composition of the GNU, which added to the declining market sentiment and consequent depreciation of the rand," Blackmore said.
He said that although the final outcome of the Budget is still uncertain, South Africa will likely see an increase in the VAT rate by 0.5 percentage points this year.
"The result will be that cost of goods, aside from those that are zero rated, and services will increase leading to a general increase in the costs of living and a reduction in disposable incomes of all South Africans. Since VAT payments are applicable to all, those earning less or on state grants will be impacted more than those with higher incomes. Some proposals have also been included in the budget to lessen this burden on the poor, including above inflation increases in social grants, not increasing the fuel levy and adding a few goods to the zero rated list, but these measures will only bring partial relief at best given the broad increases in prices expected," Blackmore said.
"In addition, the increase in VAT will have an inflationary effect which will contribute to higher interest rates and dis-incentivise consumer and business expenditure, thereby also impacting economic growth. To add to the problems facing the country, this past week also saw the imposition of 30% tariffs on South African exports to the United States. The tariffs imposed by the new US administration will reduce the competitiveness of those South African exports and result in reduced demand for those sectors of the economy impacted by these tariffs," the KPMG economist said.
"This would mean potentially finding new markets to absorb the reduction in US demand or at worst scaling down production which could lead to employment cuts and even may even threaten the sustainability of businesses affected," Blackmore warned.
The Congress of South African Trade Unions (COSATU) said it welcomed Parliament’s adoption of its Finance Committees’ recommendations to halt the Budget’s proposals to hike VAT by 1% over two years and not to adjust personal income tax brackets (PIT) for inflation.
"The Committees and now Parliament’s call for Treasury to provide alternatives to the VAT and PIT proposals within 30 days will, if honoured, provide invaluable relief to millions of workers drowning in debt and struggling to cope with the rising costs of living. We are pleased that Parliament and its Finance Committees, led by the ANC, endorsed COSATU’s call for alternatives to a tax hike that would inflict unnecessary pain upon the working class."
BUSINESS REPORT