Frank Blackmore, lead economist at KPMG told Business Report that the passing of the fiscal framework without additional pro-growth, reduced expenditure or neutral tax amendments provided a more negative market signal when compared to the more pro-growth proposals made by various parties in the lead up to the vote on Wednesday.

"The political maneuverings that sidelined the second largest party of the GNU and resulted to the passing of the vote added to the uncertainty surrounding the future stability and potential composition of the GNU, which added to the declining market sentiment and consequent depreciation of the rand," Blackmore said.

He said that although the final outcome of the Budget is still uncertain, South Africa will likely see an increase in the VAT rate by 0.5 percentage points this year.

"The result will be that cost of goods, aside from those that are zero rated, and services will increase leading to a general increase in the costs of living and a reduction in disposable incomes of all South Africans. Since VAT payments are applicable to all, those earning less or on state grants will be impacted more than those with higher incomes. Some proposals have also been included in the budget to lessen this burden on the poor, including above inflation increases in social grants, not increasing the fuel levy and adding a few goods to the zero rated list, but these measures will only bring partial relief at best given the broad increases in prices expected," Blackmore said.

"In addition, the increase in VAT will have an inflationary effect which will contribute to higher interest rates and dis-incentivise consumer and business expenditure, thereby also impacting economic growth. To add to the problems facing the country, this past week also saw the imposition of 30% tariffs on South African exports to the United States. The tariffs imposed by the new US administration will reduce the competitiveness of those South African exports and result in reduced demand for those sectors of the economy impacted by these tariffs," the KPMG economist said.

"This would mean potentially finding new markets to absorb the reduction in US demand or at worst scaling down production which could lead to employment cuts and even may even threaten the sustainability of businesses affected," Blackmore warned.

The Congress of South African Trade Unions (COSATU) said it welcomed Parliament’s adoption of its Finance Committees’ recommendations to halt the Budget’s proposals to hike VAT by 1% over two years and not to adjust personal income tax brackets (PIT) for inflation.

"The Committees and now Parliament’s call for Treasury to provide alternatives to the VAT and PIT proposals within 30 days will, if honoured, provide invaluable relief to millions of workers drowning in debt and struggling to cope with the rising costs of living. We are pleased that Parliament and its Finance Committees, led by the ANC, endorsed COSATU’s call for alternatives to a tax hike that would inflict unnecessary pain upon the working class."

BUSINESS REPORT

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Political tensions rise as Budget narrowly passes with VAT Hike, set to be challenged in court