VAT and Economic Growth: Master’s Research Unpacks Policy Impact

While the Ministry of Finance sharpened its pencil following the rejection of the Value Added Tax (VAT) increase in February, forward-thinking taxation expert Mr Thokozani Zuma had already begun investigating the topic.

His research, titled: “The Contribution of Value-Added Tax to Economic Growth in South Africa”, earned him a Master of Accountancy in Taxation this May.

Zuma, an investigative auditor at the South African Revenue Service (SARS), conducted his research under the supervision of UKZN Economist, Professor Josue Mbonigaba. Explaining his motivation, Zuma said: ‘South Africa has a significant recurring debt that limits our government’s ability to fund national priorities such as healthcare, security, and education. As experts, we must advise on policies that contribute positively to the economy without worsening the plight of the poor.’

The study evaluates how changes in the VAT rate affect both government expenditure and household spending in South Africa.

The research revealed that household spending showed minimal response to VAT shocks during the study period. However, the inflationary pressures caused by VAT increases had an indirect impact. Household spending in South Africa is strongly influenced by income inequality and unemployment, with VAT hikes placing added financial strain on low-income households and reducing their purchasing power.

In terms of government spending, the study showed that the 2018 VAT rate increase generated additional revenue to help fund national objectives. However, the increase contributed only marginally to overall government expenditure. Fiscal deficits and debt concerns – especially after the 2008 financial crisis – have constrained South Africa’s ability to spend, even when additional revenue is raised. An increase in VAT could reduce reliance on debt-financed spending.

The study recommended monitoring and managing inflation to protect purchasing power. It urged policymakers to consider exempting or zero-rating more basic goods to reduce the regressive effects of VAT on low-income households. This would help prevent VAT-induced inflation from eroding real incomes and dampening consumption.

The study also recommended regular evaluations of tax policy effectiveness. These reviews would allow for timely adjustments to ensure VAT remains within an optimal range that balances revenue generation with economic stability and growth.

Mbonigaba commended Zuma for choosing a topic that engages directly with a pressing and timely policy debate. ‘Although this study was conducted prior to the recent controversies over a 0.50 percentage point increase in VAT, it remains highly relevant as it explores the trade-off between the benefits of increased government revenue and the adverse effects on household purchasing power. In theory, a VAT increase could support long-term economic growth if the additional revenue is allocated efficiently to productive public spending. However, given the South African government’s well-documented challenges with fiscal efficiency, it is questionable whether such benefits would materialise in practice. Had the VAT increase been implemented, it is doubtful that the broader economy would have reaped significant gains,’ said Mbonigaba.

Zuma is confident that his new qualification will enhance his ability to conduct investigative audits into tax and customs crimes, particularly in illicit trade industries such as alcohol, diesel, cigarettes, textiles, and other commodities.

Completing a coursework master’s degree in just one year reflects Zuma’s strong discipline and dedication. ‘Obtaining this qualification took a great deal of effort and brainpower. On a personal level, I feel proud, relieved and, admittedly, a little drained. But I now feel well equipped to help South Africa move forward by applying my skills to balance the needs of citizens with government objectives,’ he said.

He expressed heartfelt gratitude to his family for their unwavering support throughout his research journey.

Words: Hazel Langa

Photograph: Sethu Dlamini