naamsa | The Automotive Business Council warns that the value added tax (VAT) increases, as presented in the Budget this week, will place “an overwhelming burden on household spending, reduce disposable income and curtail consumer confidence”.

The auto industry body says the proposed tax hikes comes at a time when households are already struggling under the weight of rising energy costs, elevated debt levels and slow wage growth.

“Raising VAT in a period of weak consumer spending is inherently contractionary, dampening demand when household consumption accounts for more than 60% of South Africa’s GDP.

“This policy choice could inadvertently reinforce stagnation, trapping the economy in a low-growth cycle.”

naamsa notes that transport expenses form a significant part of household budgets, accounting for 14% of total consumer expenditure.

“A VAT increase to 16% by 2026/27 will drive up vehicle costs, fuel prices, public transport fares and maintenance expenses, worsening affordability constraints.

“This regressive tax measure will disproportionately affect lower-income households, forcing them to divert spending from essential goods and services, further reducing overall consumer demand.”

naamsa says government’s debt-reduction strategy aims to lower debt servicing costs, but its success is contingent on optimistic assumptions about GDP growth, tax compliance and expenditure discipline.

“If these assumptions do not materialise, the VAT hike may fail to deliver its intended fiscal benefits, leading to continued borrowing and an even higher debt burden.”

As for the automotive industry, naamsa believes that the tax hikes will suppress vehicle demand and, consequently, reduce production volumes.

“naamsa urges government to reassess the VAT increase timeline, explore alternative revenue measures, enhance energy security and improve policy alignment.

“Without such interventions, South Africa risks further economic stagnation, declining industrial competitiveness and worsening household financial distress.”

Rather than relying solely on VAT increases to boost revenue, naamsa believes government should consider a broader strategy that includes reducing wasteful spending rather than overburdening consumers; expanding the tax base through economic growth, rather than higher tax rates; and efficient infrastructure investment execution that ensures that the R1-trillion commitment over the next three years translates into actual economic productivity gains.