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South Africa’s budget was postponed for the first time on Wednesday as tensions inside its coalition government were exposed by a planned increase in VAT. Finance minister Enoch Godongwana was due to present the first budget under the new grand coalition, formed last June between the African National Congress, the pro-business Democratic Alliance and other smaller parties. But after a meeting of President Cyril Ramaphosa’s cabinet over-ran amid a heated row over the proposal to increase VAT by 2 percentage points to 17 per cent, parliament’s Speaker Thoko Didiza announced that the speech would be “postponed” to March 12. Government officials said the objections had come not only from DA members but also senior figures in the ANC.
The postponement is the most public clash yet of the two largest parties in the coalition government, which have locked horns repeatedly since coming together, including over a new land expropriation law, exposing their contrasting ideologies. John Steenhuisen, DA leader, said the VAT rise “would have broken the back of our economy.”
The rand dropped to R18.54 to the US dollar, from R18.40 a day earlier, while South Africa’s main stock index was also lower, with retailers — which would be worse off if a VAT increase were approved — falling sharply. At a press briefing after the postponement, Godongwana said the sticking point was not necessarily the 2 percentage point VAT rise, but what other options were available to finance South Africa’s spending plans.
“Given the challenges and priorities we’re facing, how do we fund that,” he said. Godongwana said the postponement would force cabinet members to grapple with the trade-offs required to finance the country’s spending. Raising corporate taxes would have been counterproductive, he said, as South Africa already levied higher rates than many of its peers.
South Africa’s fiscal coffers have been mostly on the mend after the Treasury posted a narrow budget surplus last year before debt payments. It has forecast a wider surplus this year. South Africa last raised VAT in 2018, when public finances were in much worse condition after years of chaos under former president Jacob Zuma and the loss of prized investment-grade credit ratings.
VAT is a particularly politically sensitive tax in South Africa because of the country’s severe post-apartheid inequality, where more than a third of people are unemployed, even with zero rates for many of the items most used by the poorest. The budget postponement drew condemnation from political parties that were not part of the coalition government. Julius Malema, leader of the populist Economic Freedom Fighters, which favours nationalisation, expressed his opposition to the VAT increase, saying it was “clear the government has collapsed” over the issue. Steenhuisen, who is the agriculture minister in the coalition government, said postponing the budget was “not the most ideal situation” but it was “absolutely the right decision”.
He reiterated his party’s “resolute opposition to the ANC’s plan to hike VAT at a time when millions of South Africans are already suffering under a cost of living crisis”. As the budget had to be approved by parliament, he added, there was also a “very real prospect” that it would not have won the support of a majority of parties. Peter Attard Montalto, managing director of consultancy Krutham, said Godongwana had “misread the politics and lost”, even if raising VAT was a legitimate response to spending increases.
The Treasury would now have to remove the proceeds of the rise in VAT, increase other taxes and cut additional expenditure to meet its budget. “It’s going to be very hard to balance,” he said.
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