South Africa’s new leadership has announced it was taking the politically risky step of raising value-added tax (VAT) for the first time in 25 years to cut the deficit and stabilise debt under new President Cyril Ramaphosa.
The government of Africa’s most industrialised country has to plug a revenue hole in its budget and repair its economy after nine years of mismanagement under the scandal-plagued Jacob Zuma.
The move to raise VAT to 15 per cent from 14 starting in April is expected to generate more 23 billion rand ($2 billion) of revenue in 2018/19.
But with the VAT rate unchanged since 1993 the move was likely to prove unpopular ahead of a national election next year.
“This is a tough, but hopeful budget,” Finance Minister Malusi Gigaba said, acknowledging the reality in his budget speech to parliament on Wednesday.
“We decided that increasing VAT was unavoidable if we are to maintain the integrity of our public finances.”
As Gigaba read his budget speech, the rand extended gains to 0.81 per cent against the dollar, government bonds firmed and retail shares on the stock exchange fell.
Whatever cabinet Ramaphosa finally settles on will face an uphill battle to revitalise growth and create jobs in a nation still polarised by race and inequality more than two decades after the end of white-minority rule in 1994.
Much of the blame for the state of the economy has been laid at the door of Zuma and his allies.
He was forced to step down as president this month by the ruling African National Congress (ANC), following a series of scandals. He has denied all wrongdoing.
But treasury officials sought to project a relatively optimistic outlook as they assessed economic prospects for the immediate future.
Gigaba said poor households would be cushioned against the VAT rate rise through a zero-rating of basic food items such as maize meal and beans, and welfare payments increases.
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