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VAT increase could lead to recession

07 March 2016   (0 Comments)
Posted by: Author: Craig Dodds
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Author: Craig Dodds (IOL)

Introducing a VAT increase this year - as many had expected was on the cards - could have tipped the economy into recession, the Treasury said in Parliament.

Responding to comments from civil society stakeholders on the Budget during hearing this week, Treasury director-general Lungisa Fuzile said while there were some positive aspects to VAT, it was of all the available tax options the one with the most immediate impact on economic growth.

Economists and tax experts have questioned why Finance Minister Pravin Gordhan didn't opt for a VAT increase in the Budget, given that former minister Nhlanhla Nene had put the possibility on the table in the medium-term budget policy statement in October.

"Our modelling showed that in addition to a whole host of other things, positive and negative - there are positive things about VAT - it has the most negative impact in the immediate term on growth,” Fuzile said.

"So when growth is slowing it would be unwise to increase VAT because very easily it could drive an economy into a recession.”

He said in a situation of rapid growth the negative impact of a VAT increase would be "more tolerable” because all it would do would be to shave off some of that growth.

This would seem to make a VAT increase unlikely for as long as the economy remains in the doldrums, even though the Treasury has committed to finding additional revenue of R30bn between 2017 and 2018.

Fuzile also said the use of limited compensation for fiscal drag in tax relief had been a gentler way of raising a significant sum without hurting lower-income earners.

"Where people would seem to suggest that more taxes would make sense, I would draw the attention of the meeting to another table which shows how tax as a percentage of GDP has risen over the period we present, 2012/13, it’s about 24 percent, and by the 2018/19 fiscal year, it will be 27.8 percent, so it has drifted upwards,” Fuzile said.

"Those are things you have to balance. There is no magic number, but when you get to the levels ours is, you begin to say are we perhaps taking too much from the economy in the form of taxes,” Fuzile said.

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