By: Marcus Turner Jones
For the first time since 1993 and the dawning of the democratic era in South Africa, value added tax (VAT) and income tax in the country have been raised. VAT will increase from 14 per cent to 15 per cent in South Africa from April, as announced by finance minister Malusi Gigabe in his February budget speech. Already this has generated a lot of criticism and speculation, with the rises set to impact the country and its economy in many ways.
Why the Rise Now?
South Africa has undergone the recent political change with new president Cyril Ramaphosa taking over from Jacob Zuma in February. The rise in VAT is seen as one of his first actions in an attempt to turn around state finances which have been mismanaged and plagued by corruption for years. It is also a measure to tackle rising debt and prevent the economy falling further.
Currently the fiscal debt is expected to be at 4.3 per cent of gross domestic product in the financial year ending 2018. Raising VAT and income taxes is predicted to raise R36bn (US$3bn) in revenue and cut the fiscal deficit to 3.5 per cent. The weak economy has left the South African government facing a R50bn shortfall in tax revenue, meaning action must be taken to address this.
What Has Been the Reaction?
The main critics of the South African government’s decision to raise VAT and income taxes have included labour unions and civil society groups. They have challenged the decision, claiming it will be a disproportionate burden on the poor, as these measures are essentially raising the funds required to work towards financial stability from their pockets.
Mr Gigaba has admitted himself that these fiscal proposals will cause economic discomfort but claims it is unavoidable. While the move goes some way towards cutting the deficit, in the wider scheme of things many believe that fundamental budget reform is what’s really needed. New policies that tackle structural constraints in the South African policy and dealing with corruption require plenty of focus as well.
Will it Impact the Economy?
Undoubtedly, though whether it has the desired positive effect the government is hoping for remains to be seen. The VAT rise may only be one per cent, but consumers will feel it in their pockets from April 1st as it affects almost all products and services. A rise in prices across the board coupled with an increase in fuel levy will have an impact.
Many digital goods and services from foreign firms, such as Netflix subscriptions, have received inconsistent treatment when it comes to VAT. South Africa’s VAT regulations that cover foreign businesses have been updated as well though, meaning price increases of at least 15 per cent can be expected.
For financial services and those with a stake in them, the VAT rise and increase in prices could lead to a drop in value. As consumers will have less money to spend they are less likely to be making financial investments or savings, so financial services will be hoping for a quick upturn in the economy.
How Will The Markets React?
Forex trading is exempt from VAT but that doesn’t mean it won’t be affected. Generally, any change in monetary policy and such macroeconomic events lead to a change in the economy and volatility for the country’s currency. A quality FX broker can alert you to any price changes as they happen. The South African rand will be at risk in the early stages and in the aftermath of political change, but if the rising budget deficit is corrected then it could strengthen in time.
The South African government has said it will assess the impact of the VAT increase to soften its impact, likely through adding more zero-rates and tax-free items. In the coming months the true impact of the rise will become clear.