The VAT question and US foreign policy question have something in common — they both involve pragmatism.
The VAT debate has been fascinating because it is so multifaceted that several things can be true at once. It can be true that VAT is the best tax to hike if you have to raise more revenue, while it can also be true that parties see political advantage in prioritising different mixes of tax and spending.
What might make sense in terms of dry, dispassionate fiscal policy may well not be appropriate from a political priority standpoint. Similarly, what is best for one budget or political event in the government of national unity (GNU) might not be the case for several budgets and GNU fights one after another.
What has got lost in the debate — and the Sunday papers hardly helped in this case — is that a VAT hike is not necessarily “progressive”. It may be more progressive than some other options on the revenue front, but hiking VAT and taxing anyone more is not “progressive” in and of itself.
It can also be “progressive” if it is paying for redistribution. But this is also a complex area — the SA tax and benefit system is already one of the most redistributive in the world, so highly progressive. It’s a political choice whether it should be more progressive than this, but the more interesting point is that just looking at the lowest income deciles is a partial view in terms of assessing things in a pure policy terms, and even politically.
The ANC made this mistake last year when talking about National Health Insurance (NHI) and thinking that providing additional social wage support to the lowest income deciles was all that mattered, overlooking the negative effect NHI would have on those sitting above the lowest deciles in terms of policy change and the funding required for it (meaning more tax).
Risky strategy
This is why the VAT issue is so interesting — it is far from clear that raising VAT would be positive for the ANC politically if we consider that the marginal support for the party is not among the poorest but among the lower middle class. A VAT hike as an appeal to its core base could be a strategy for the ANC, but it would seem to be highly risky given that it could drive some in the lower middle class not to vote, or to vote for other parties.
There is much to debate here, and I hardly want to make this sound “certain” — the point is that there are cross-cutting issues of policy and politics that mean the implications are far from obvious. What I do want to highlight is that distributional analysis of budgets in SA is generally weak, and far too focused on the most poor rather than the whole distribution and particularly the lower middle class.
Overall, the idea of the ANC remaining weak or getting weaker in 2029 (and the 2026 local elections) must surely be on the table, even if the question of whether other parties will benefit at the ANC’s expense remains unclear.
The ANC also does not seem to do polling or focus group research on these types of issues, due to resource constraints. If it did, we suspect internal arguments, especially on foreign policy, might be interesting.
Next week’s second attempt at passing the budget will need to be measured in far more nuanced ways on three fronts: policy, socioeconomic impact and political.
The idea has sort of taken hold in many places that establishing a department of government efficiency in SA would be far too hard, and that we must be mindful that previous attempts such as the famous “Spier presentation” moment, as well as when zero-based budgeting was first suggested, saw intent quickly lose momentum and political backing.
But insisting that we can’t go back over the past 30 years of fiscal expenditure policymaking to find cuts is surely mad and unacceptable. As ever in SA, the question is one of political will to change the conversation, which may not be possible ahead of next week’s budget but needs to be pursued before the next medium-term budget policy statement.
Political will will also be needed to change the budgeting process. It is quite clear that what has happened before cannot work again going forward, and in this regard the GNU could emerge stronger if it gets this right. That might well make SA fiscally stronger and lead to further upgrades if done correctly. (The alternative of more severe ratings and negative pressure on the markets must also be borne in mind).
Thinking of ratings is why the “threat” of the EFF in the Sunday papers this past weekend was so laughable. The resulting blow-up in ratings and bond yields that would result, and from there higher debt service costs squeezing out other spending, lower growth and higher taxes, drain this of credibility.
Time will tell, but looking through the short-term logistical drama of events as they happen is exceptionally important for policy and politics.
• Peter Attard Montalto leads on political economy, markets and the just energy transition at Krutham, a SA research-led consulting company.
This article first appeared in Business Day.
