With finance minister Enoch Godongwana expected to deliver his budget speech on Wednesday, the DA – which is part of the government of national unity – said it does not support increases to personal income tax, corporate income tax and value added tax (VAT).

Economist Makwe Masilela, the chief investment officer and founder of Makwe Fund Managers, explains what a possible tax increase would mean for the already cash-strapped South Africans.  

Do you think there will be any tax increase?

I don't think there should be a tax increase but I won't be surprised if there is any because already we have used our foreign reserves, tapping into them to deal with our debt.

They (Treasury) shouldn't touch the VAT, they should rather touch other forms of tax such as capital gains tax, and tax on dividends and estate duty tax – that is what I think they should look at. Not your pay-as-you-earn tax because we have very few people working.

Also, not the VAT because the consumer is already under strain, and not company tax because you want to encourage investments into the country but more importantly, the focus should be on growing the economy.

Should the VAT increase, will that stoke inflation?

Yes, and inflation can tip our economy into a recession. We have very few things that are exempted from VAT, and already we expect to have issues with tariffs coming out of the US. We expect those policies from the US to be inflationary, and coupled with all that, we then generate our inflation back at home. Already there [are] risks that tariffs might include levies based on VAT in other countries.

How would the overall economic growth be impacted by the VAT increase? 

By all means it will be impacted because when you have inflation, it means it is a general increase of prices. So, whatever you are paying would be extra and if people cannot afford it, then they are not going to buy it or produce more of it. 

Would small businesses or start-ups be affected? 

They would be affected negatively. The VAT [increase] would make life difficult for customers because they would be spending more. They will either look for a substitute or stop buying.

If that happens, then the manufacturer would produce less because there is no demand. If it produces less, it means they would lay off people and the government will start receiving less in the form of pay-as-you-earn tax and that is the biggest tax the government is getting.