National and Regional Impacts of an Increase in Value‐Added Tax: A CGE Analysis for South Africa

The South African National Treasury expected a revenue shortfall of R48.2 billion in 2017/18 and proposed tax policy measures to raise an additional R36 billion in 2018/19. A key component to raise the additional revenue was a 1% point increase in the VAT rate to 15% effective from 1 April 2018. The...

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Bibliographic Details
Published in:The South African Journal of economics 2020-03, Vol.88 (1), p.90-120
Main Authors: Roos, Elizabeth Lousia, Horridge, J. Mark, Heerden, Jan H., Adams, Philip D., Bohlmann, Heinrich R., Kobe, Kgatedi Kenneth, Vumbukani‐Lepolesa, Bokang
Format: Article
Language:English
Subjects:
Computable general equilibrium (CGE) models
Cost of living
Economic activity
Economic analysis
Economic impact
Government spending
Health education
Regional differences
regional modelling
Revenue
South Africa
Taxation
VAT
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Summary:The South African National Treasury expected a revenue shortfall of R48.2 billion in 2017/18 and proposed tax policy measures to raise an additional R36 billion in 2018/19. A key component to raise the additional revenue was a 1% point increase in the VAT rate to 15% effective from 1 April 2018. The increase in the VAT rate was not welcomed as it would increase the cost of living, especially for the poor. We investigate the potential economy‐wide and regional impacts of raising VAT and increasing public spending on education and health. We do this by developing and applying a multi‐regional model of the South African economy that includes detailed tax and spending features. In this model, when we increase VAT, the impacts are driven by the direct shock to the model, accompanied by differences in regional economic activity. We find that effects on GDP vary between regions but are generally negative.
ISSN:0038-2280
1813-6982
DOI:10.1111/saje.12240