VAT increase a 'consumer penalty' - BIDPA chief

MBONGENI MGUNI
Staff Writer | Wednesday February 10, 2010 00:00

 

For 2009/10, the country's economy contracted by 4.6 percent and - according to Fidzani - the five percent growth predicted by government for 2010/11, will be undermined by the two percent increase to Value Added Tax (VAT). For 2010/11, government expects to earn P5.5 billion from VAT, which will be the third largest contributor after non-mineral and mineral revenues.

Finance and Development Planning Minister, Kenneth Matambo on Monday announced that VAT would climb to 12 percent with effect from 01 April 2010. The increase is designed to buttress government coffers, in light of projected lower mineral and customs revenues going forward.

Fidzani, who has more than a decade at the helm of government's think tank, said the twin effects of the VAT increase and the absence of a civil service salary review would impact consumer spending, which is a critical component of economic growth.

'This Budget contains a penalty on consumer confidence because of the lack of a civil service salary review and the increase in VAT. The real income of consumers is going down. 'We need consumer spending in order to grow the economy but the decision in the Budget seems to be anti-growth. One would have expected that civil service salaries would not rise, but to then top that with a VAT increase comes as a surprise to me because it penalises spending in the economy which affects growth,' he said. The BIDPA chief stressed that spending was part of the range of fiscal stimuli, necessary to keep the domestic economy afloat and growing. 'These are difficult times and we should strive for prudence, but (with the VAT increase) there's the possibility that we have penalised areas of potential growth especially the consumer confidence aspect which can actually lead to economic contraction,' he said.

Prominent economist, Keith Jefferis, questioned whether government had made the right decision in hiking VAT instead of restraining its spending. Jefferis has been at the forefront of economists pushing government to review priorities in development spending and curb its recurrent budget.

Sefalana Holdings Managing Director, Chandra Chauhan said while the private sector tended to take a cue from government in terms of wage increases, with none forthcoming in the Budget, it is hoped the private sector will revise wages to at least above inflation.

The Ministry of Finance's Secretary for Development and Budget, Badumetse Hobona, defended government's decision to increase VAT and withhold a salary review for civil servants. Hobona said these and other decisions taken in the Budget were influenced by the 'unprecedented loss of national income,' and the need to streamline all spending.

'It was not easy getting to the 12 percent decision for VAT. However, at one point in Cabinet, it was realised that the deficit was P17 billion and the Moody's rating agency had also just visited the country.

'We had to firm up and thus we believe the P12 billion deficit and 12 percent will be considered sufficient by the rating agencies. These agencies can also see the state of the worldwide economy and they can see that we are doing our best,' she said.

With the mining industry having plunged 31.4 percent, government is hoping increased earnings from VAT will complement other revenue streams such as the planned issue of bonds on the local market. Traditionally, VAT contributes about 14.4 percent of total government earnings, which in the current financial year is equivalent to P3.9 billion.