SOUTH African Reserve Bank (SARB) Governor, Lesetja Kganyago, has cautioned that the proposed 2 percentage points increase in the value-added tax (VAT) would be treated as an “economic shock”.

Last week, finance minister Enoch Godongwana was forced to postpone tabling the 2025 Budget Review in Parliament by three weeks as parties within the Government of National Unity (GNU) disagreed over the increase of VAT from 15% to 17% in a bid to raise an additional R58 billion in revenue.

Speaking to the SABC on the sidelines of the G20 meeting of Deputy Ministers of Finance and Deputy Central Bank Governors in Cape Town on Tuesday, Kganyago hinted that the SARB would react when the VAT increase leads to further price increases.

“Part of it is that they are not only charging VAT but also paying VAT they might take that into account and it perpetuates the central bank has to react to that, but if it is just a once-off shock and we also do not see prices continuing to rise as a result of VAT increase there is no need for the central bank to respond,” Kganyago said.

VAT is seen as a regressive tax that disproportionally negatively affects the poor.

Cabinet has reportedly rejected a reworked Budget, this time without the 2% VAT increase, telling Godongwana that this will not work for the people.

President Cyril Ramaphosa called a special Cabinet meeting on Monday to deliberate on the uncertain Budget. This is where Godongwana presented his other Budget idea.

In a six-hour discussion, Godongwana reportedly told participants that the budget without VAT increases essentially limited the extent of the suggested increases to departments that he had originally intended to mention in his speech.

Cabinet is now reportedly considering a proposal to introduce a wealth tax and is working with the South African Revenue Service to determine levels of wealth that are declared to the tax authority.

DA spokesperson on finance, Mark Burke, on Tuesday said that the R60bn in new expenditure that the Treasury said it needed to fund was only 3% of the overall R1.9 trillion budget.

Burke said there was no need to tax to find these funds, which can easily be sourced from failing, failed and underperforming programmes and sub-programmes.

“South Africa doesn’t have a revenue problem, it has a problem prioritising spending on programmes that drive growth and in turn job creation. That’s not why we’re in the GNU government, we need to break the cycle and reject any new tax hikes that can only damage the economy,” Burke said.

“So, while some media might be inclined to push the narrative of “how do to fill the void left by the rejected ANC VAT hikes”, we believe it’s time to think critically. We do not have a shortage of tax revenue, we have a shortage of scrutiny.”

Burke said South Africa’s tax base was too small to carry additional tax increases without choking private sector investment and further damaging the economy.

He said tax increases, including a mooted wealth tax, will chase away investment, shrink our tax base, and ultimately, cause damage to the economy.

The DA has proposed immediate cost-cutting measures that will free up at least R60 billion without cutting essential services, including a 50% reduction in government advertising budgets, 33% reduction in travel and catering expenditure across departments, a hiring freeze for all non-essential government positions for 12 months, and a national audit of “ghost employees”, following the Prasa audit that uncovered approximately 10% of their workforce didn’t exist.

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South African Reserve Bank warns of economic shock amid VAT increase debates