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

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  • Elizabeth Lousia Roos
  • J. Mark Horridge
  • Jan H. van Heerden
  • Philip D. Adams
  • Heinrich R. Bohlmann
  • Kgatedi Kenneth Kobe
  • Bokang Vumbukani‐Lepolesa

Abstract

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.

Suggested Citation

  • Elizabeth Lousia Roos & J. Mark Horridge & Jan H. van Heerden & Philip D. Adams & Heinrich R. Bohlmann & Kgatedi Kenneth Kobe & Bokang Vumbukani‐Lepolesa, 2020. "National and Regional Impacts of an Increase in Value‐Added Tax: A CGE Analysis for South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 88(1), pages 90-120, March.
    • Handle: RePEc:bla:sajeco:v:88:y:2020:i:1:p:90-120
    DOI: 10.1111/saje.12240
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    Cited by:

    1. Cesar Revoredo-Giha & Luiza Toma & Faical Akaichi, 2020. "An Analysis of the Tax Incidence of VAT to Milk in Malawi," Sustainability, MDPI, vol. 12(19), pages 1-17, September.
    2. Jessika A. Bohlmann & Roula Inglesi-Lotz & Heinrich R. Bohlmann, 2022. "Carbon Tax and its Impact on South African Households," Working Papers 202248, University of Pretoria, Department of Economics.
    3. Pierre N. Mamboundou, 2022. "Is the value added tax reform a source of food insecurity and food poverty? The Burkina Faso case," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(7), pages 1334-1346, October.

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