South Africa’s finance minister has dropped plans to increase value-added tax (VAT), in a major climbdown to prevent the collapse of the coalition government.
Enoch Godongwana’s decision came after the second-biggest party, the Democratic Alliance (DA), threatened to quit the government, warning a VAT hike would hurt the poor the most.
Godongwana, a member of President Cyril Ramaphosa’s African National Congress (ANC), had argued the increase was needed as the government was facing a financial crisis.
But with other parties also rejecting the hike, it raised the prospect of parliament taking the unprecedented step of voting down the national budget, forcing him and the ANC to concede.
The climbdown is likely to be a relief for many South Africans, who are already struggling financially because of the high cost of living and an unemployment rate of 32%.
The ANC lost its parliamentary majority for the first time since since white-minority rule ended in 1994 in last year’s elections, forcing it to share power.
The DA welcomed the climbdown, saying it had entered the government “with steel spines and a clear mission: grow the economy and create jobs to rescue South Africa”.
“We opposed the unjust VAT hike from day one – and South Africa won,” it said in a statement.
The DA had also challenged the hike in the High Court, with three judges – who heard the case – expected to give their ruling before the end of the month.
Godongwana had proposed increasing Vat by half a percentage point, to 15.5% with effect from 1 May, saying it would help provide much-needed revenue to improve public services like education and health.
The ANC denied it had bowed to pressure by scrapping the increase.
The decision had been taken out a of “a shared commitment across party lines that the working class, the poor, and all other people cannot be further burdened in this economic climate”, said party spokesperson Mahlengi Bhengu-Motsiri.
In a statement, the finance ministry said there would now be a need to revisit “other expenditure decisions” and to scrap “measures to cushion lower income households” from the planned VAT hike.
The Economic Freedom Fighters (EFF), the second-biggest opposition party in parliament, said South Africa had witnessed a “budget fiasco”, and the “incompetent” Godongwana should resign.
The ANC was banking on smaller parties – especially Action SA, which was seen as the kingmaker – to gain a parliamentary majority for the budget, but it refused to budge on its demand for the increase to be dropped.
The hike was also opposed by the biggest trade union federation, the Congress of South African Trade Union (Cosatu), which is in alliance with the ANC.
Even the head of the government’s tax agency questioned the proposed increase, saying the last hike in 2018 did not significantly boost government revenue.
The crisis is likely to further damage the ANC’s credibility, with opinion polls suggesting that its popularity is falling.
An opinion poll released earlier this month by the Institute of Race Relations put the party’s support at 29.7%, while a poll in February by the Social Research Foundation put it at 32%. Both had a margin of error of around 4%.
The foundation said a “significant chunk” of ANC voters were “so dissatisfied with the party and uncertain about their future voting intention” that they had become “free agents in South Africa’s voting market”.
In last year’s election, the ANC’s share of the vote slumped to 40%, from 58% in the 2019 poll.
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