Cut VAT to 11.5% to give stressed South Africans some relief – IRR
23 August 2024
Recent reports highlight the considerable financial pressure South Africans are under.
Domestic workers, 83% of whom are the sole breadwinners in their households, have seen their incomes rise by a paltry 5% over the past year, while their expenses have increased by 15%, according to a report by SweepSouth, a home services company.1
The study says that there are about 850,000 domestic workers in South Africa – and that that number is still 15% lower than it was before the Covid-19 lockdowns. 21% of survey respondents lost their jobs last year, while 36% said they had lost some work because employers could no longer afford to pay them.
In the middle class, a study by PayProp, a company selling rental management and rental payment software, found that renters earning under R40,000 per month were spending 50% of their income on repaying debt.2 Their expenses were rising faster than their incomes, reducing their average disposable income from 27.2% of net income to 23% over the course of last year.
The high debt repayments and the rising cost of living are leaving precious little money to pay for healthcare, education, security and other measures that must be privately financed because state-provided services are collapsing. They also leave no scope to generate savings for a rainy day.
A simple policy measure is available to the government that can help alleviate the pressure on SA's hard-pressed consumers: it is to place public procurement on a value-for-money basis and use the savings to fund a tax cut that will benefit all consumers.
Public procurement is currently governed by the Preferential Procurement Policy Framework Act, which will soon be replaced by the Public Procurement Act. The current law inflates public procurement costs. The new law will inflate them far more. These laws bake overspending into the government's trillion-Rand budget for buying goods and services and should therefore be repealed.
The procurement laws inflate costs by prioritising social engineering over value for money. As a result, taxpayers have to pay higher taxes than necessary while getting fewer or worse services. IRR Legal is in communication with the National Treasury to ascertain the amount of state overspending caused by these laws and will release its findings as soon as they are available.
IRR calculations show that putting public procurement on a value-for-money basis, as recommended by the Zondo Commission, would suffice to fund a substantial cut in the VAT rate: down from the current 15%, to 11.5%. This would immediately give financial relief to all South African consumers – including domestic workers, the middle classes and the unemployed.
Conservatively calculated, it would amount to an immediate economic growth stimulus worth over R100 billion, which could be achieved without cutting state services, without raising taxes, and without increasing government debt.
The IRR’s paper “Slash waste, cut taxes” – part of the Blueprint for Growth series – explains how this can be done and is available on the IRR’s website here.
Issued by Gabriel Crouse, IRR Legal Executive Director and author of "Slash waste, cut taxes", 23 August 2024
