VAT needed to be increased to stabilise debt

Thursday, February 22, 2018

Finance Minister Malusi Gigaba said government had reached a point where increasing value-added tax (VAT) had to be done.

This, he said, was necessary after he announced a R51 billion revenue shortfall in the medium term budget in October, which meant that the budget deficit would rise and that the debt to GDP would hit the 60% mark – meaning a bulk of the country’s budget would go towards servicing debt.

After remaining unchanged since 1993, the Minister announced VAT would be increased by a percentage point to 15%.

In a post-budget breakfast conversation with SABC Morning Live’s Leanne Manas at the Cape Town International Convention Centre, the Minister said this, compounded with the former President’s announcement of fee-free higher education in December, left the National Treasury with no choice but to take fiscal measures that would stabilise debt.

“We are probably a year or two overdue, we should have introduced [VAT] a few years back but we had to squeeze the budget in all sorts of ways until we ran out of options.”

The Minister said allowing the debt to GDP to hit the 60% ceiling would have been bad news for the country.

“What it would have meant if we allowed it to do that, let alone that we would obviously be downgraded by all the ratings agencies, it would have meant that the fastest rising item of the budget would be debt service costs and servicing the interest on our debt.

“It would then eclipse all other items of spending such as social expenditure and economic investments. Now you don’t want to be doing that and therefore not transforming your society because you are paying the debt. All you are doing is taking this debt and force-feeding it to future generations,” he said.

The Minister said that during the medium term budget in October, the National Treasury announced that there was a need to stabilise the debt below 60% by arriving at a package of fiscal measures that would amount to R40 billion.

“So we had to find the R40 billion, on top of which came the 16th of December, the former President announced fee free higher education, which meant that we would need to find R57 billion [over the next three years] in order to cater for the phasing in of this policy decision.

“We had no choice. We had to find a revenue measure that was going to give us a sufficient quantum of money that would enable us to do all the things that we needed to do when we have taken the decision to cut expenditure and look at all other tax revenue sources.”

The Minister said fee-free higher education was a policy that had been decided upon as far back as the ANC’s policy conference in June last year.  

He said fee-free higher education breaks the cycle of poverty of the poor and their children.

A Cape Town high school learner Tershin King stood up and said - before asking what measures government would take to curb overspending: “I just want to thank the Minister for fee free higher education. Because of this, me and my fellow classmates can go study and my grandma is thankful for the extra R90”.

The Minister said there is an attempt by the National Treasury and the Department of Planning, Monitoring and Evaluation to develop a system to assist departments to operate within the budgets provided to them and penalising those that overspend because it undermines the budget process. –

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