In his recent Budget Speech, Finance Minister Enoch Godongwana signalled a bold move by the government to extract more disposable income from South African households, a decision that has raised eyebrows among economists and citizens alike.

The proposed staggered increase in Value Added Tax (VAT) by 1% over the next two years aims to alleviate spending pressures on vital social and physical infrastructure. However, critics argue that this decision reflects deeper issues of inefficiency and mismanagement within government spending.

Vinothan Naidoo, Associate Professor in the Department of Political Studies at the University of Cape Town, expressed his concerns regarding the implications of the budget.

“The big question that the 2025 budget yields for South Africans is whether the staggered increase in VAT—0.5% over two years—is worth the political gamble in the near term, or does the gamble risk more than it is likely to gain?” he posited.

A Pyrrhic Victory?

Naidoo warned that if the budget passes, it may prove to be a "pyrrhic victory" (victory won at a great cost) for the Government of national unity (GNU).

He highlighted the troubling trend of the government relying on increased taxes to fund what he describes as "inefficient and unreliable government spending," marked by procurement irregularities and overall financial mismanagement.

“The government seems comfortable extracting more disposable income from South African households to pay for these systemic issues,” he stated.

While Godongwana defended the VAT increase as necessary for addressing urgent needs in public health and education, Naidoo is skeptical.

“The wiggle room afforded by the short-term marginal increase in VAT does not match the systemic expenditure problems it is intended to fix,” he argued.

He pointed out that while the minister referenced “building state capability” as a means to reduce wasteful spending, there was little concrete action or follow-through on past recommendations from expenditure reviews.

The Impact on Essential Services

Godongwana stated that the proposed VAT increase is intended to support sectors like public health and education; however, Naidoo believes it may not yield the necessary improvements.

“It is evident that the government has little room but to prop up significant compensation spending to sustain demand for these services without addressing the overstretched personnel-client ratios,” he noted.

He fears that instead of enhancing these critical sectors, the additional VAT revenues will merely maintain the status quo.

Moreover, while the allocation of funds to local governments is a welcome step, Naidoo pointed out that it primarily serves to subsidise free basic services at a time when households will be facing higher VAT costs.

“One wonders whether more diligent action directed at improving how the government spends, rather than what it spends, would have avoided a VAT squeeze,” he said.

Steps Toward Improvement

Despite his criticisms, Naidoo acknowledged some positive aspects of the budget. The Finance Minister outlined initiatives aimed at controlling wasteful expenditure without cutting essential programs.

These include reducing transaction costs through conditional grant reviews, reassessing the Treasury’s spending allocation methodology, and auditing the public employment system to eliminate fraud and duplication.

While these measures may hold promise for the future, Naidoo remains cautious.

“We need to see concrete results from these initiatives before we can be optimistic about their impact on government spending efficiency,” he asserted.

He argued that the road ahead for South Africa’s fiscal policy is fraught with uncertainty, but the calls for accountability and better governance are louder than ever.

thabo.makwakwa@iol.co.za

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