South Africa should have hiked value added tax (VAT) two years ago to plug widening gaps in government revenue and cap rising debt, finance minister Malusi Gigaba said on Thursday.
Africa’s most industrialised economy took the politically risky step of raising VAT, a move likely to prove unpopular ahead of a national election next year, as part of efforts to cut the deficit and stabilise debt under new President Cyril Ramaphosa who was elected a week ago.
The new leadership aims to plug a revenue hole in its budget and repair its economy after nine years of mismanagement under the scandal-plagued Jacob Zuma who resigned last week.
“We had run out of options,” Gigaba told a business breakfast in Cape town a day after tabling his maiden budget where he announced a VAT increase to 15% from 14% starting in April, the first such hike in 25 years.
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.
The opposition criticised Gigaba’s move to raise the tax, which has remained unchanged since 1993.
The country’s debt faces the risk of a downgrade to “junk” by Moody’s after downgrades to sub-investment grade by S&P Global Ratings and Fitch last year. Moody’s said it would make a ratings decision soon after the budget announcement.
NKC African Economics analysts said in a note that it believed “Moody’s Investors Service will not downgrade South Africa’s debt to sub-investment grade at its upcoming credit rating review.”