South Africa's Proposed VAT Increase Stalls Budget Unveiling

Key Points:

* South African Finance Minister Enoch Godongwana proposed a consumption tax increase to address rising government debt.
* The Democratic Alliance and labor unions opposed the tax hike.
* The revised budget will be released in three weeks.
* The Treasury emphasizes the unsustainability of South Africa's debt trajectory.
* Economic growth is projected to improve, supported by increased infrastructure investments.
* Tensions with the US and global economic headwinds pose risks to the growth outlook.

Details:

South African Finance Minister Enoch Godongwana's plan to increase value-added tax (VAT) by 2 percentage points to 17% from April 1st was met with strong opposition from within the nation's coalition government. The proposed increase would generate an additional 191 billion rand ($10.3 billion) over three fiscal years.

However, the Democratic Alliance, the second-largest party in the government, expressed concerns over the lack of consultation. Labor unions have also voiced their opposition, arguing that the poor would be disproportionately impacted by the tax hike.

Following the withdrawal of the budget, Godongwana acknowledged the political risks associated with the VAT increase, stating that extensive negotiations would be necessary to mitigate them.

The withdrawn budget review reiterated the Treasury's long-standing concern about the unsustainability of South Africa's debt trajectory. It emphasized the need for increased revenue and outlined measures to minimize the impact on economic growth and employment, such as increasing welfare grants and adjusting tax brackets for lower-income earners.

Despite the setback, the Treasury maintains its projection for debt stabilization at 76.1% of GDP in the next fiscal year and a budget deficit of 5% for the year ending March 2023. GDP growth is anticipated to average 1.8% over the next three years, supported by a stable electricity supply, lower interest rates, and increased infrastructure spending of 1.03 trillion rand.

However, the Treasury also acknowledges potential risks to the growth outlook, including geopolitical tensions, trade disruptions, and a strengthening US dollar. It also expresses concern over the impact of US aid cuts due to South Africa's expropriation laws and relations with Iran.

The withdrawn budget proposed salary increases for state workers and increased funding for healthcare and early childhood development. The Treasury emphasized that the additional expenditure would be fully funded by tax increases.