The rand weakened significantly on Wednesday following the unprecedented cancellation of the budget speech, highlighting the cracks within the government of national unity (GNU).
The speech, which was set to announce a major increase in VAT was cancelled at the eleventh hour following disputes about the tax hikes — marking the first time in democratic SA that the budget speech is delayed — sending the markets into panic.
The local currency weakened to R18.58 against the dollar following the cancellation, from R18.33 earlier in the day.
Business Day reported on Wednesday that the Treasury would increase social grants by above inflation, freeze the fuel levy and increase the basket of zero-rated goods to shield the poor from the decision to hike VAT for only the second time in democratic SA.
The decision to increase VAT was taken after weighing different options, including doing away with the social relief of distress (SRD) grant and taking on more debt, Business Day understands.
Both options were considered the least favourable due to several reasons, including keeping ratings agencies at bay.
The money expected to be collected from the VAT increase is expected to plug holes in the education, social wage and education budgets — particularly keeping thousands of teachers’ jobs in KwaZulu-Natal.
The KwaZulu-Natal department of education has warned that teachers will not be spared the latest round of budget cuts and that 11,000 posts are at risk due to budgets having been cut.
The last time the Treasury lifted the VAT rate was in the 2018/19 budget, when then-finance minister Malusi Gigaba increased it from 14% to 15%.
Without any zero-rating or exemptions, VAT is inherently a regressive tax, turning into a financial burden on the poor in a country riddled with deep-seated poverty, unemployment and a weak economy.
President Cyril Ramaphosa said last year that the GNU would look to expand the basket of essential food items exempt from VAT and undertake a comprehensive review of administered prices.
According to Cliffe Dekker Hofmeyr, when VAT was introduced on September 30 1991 at a rate of 10%, only two food items were zero-rated: brown bread and maize meal.
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