Pushback against 2% VAT hike grounds South Africa’s Budget 2025

The biggest surprise stemming from South Africa’s National Budget 2025 was that it simply didn’t happen. This meant the thousands of citizens who tuned in to their preferred financial news feeds to get the lowdown on government’s revenue and spending proposals for the coming year or three were left in the dark, figuratively for a change.

First postponement in three decades

The budget presentation, scheduled for 2PM on Wednesday, 19 February, was postponed after a last-minute Cabinet meeting where non-ANC Government of National Unity (GNU) partners pushed back against a surprise 2% hike in the VAT rate. This was the first such postponement in over 30 years. As editors and writers contemplated how to replace their planned budget coverage, analysts and commentators had a field day speculating on the underlying causes of the delay and its economic, political, and social impact. 

Government was hoping the VAT hike would yield an extra R50 billion or so to make up for revenue collection shortfalls and cover some of its spending overruns; but the non-ANC GNU partners, and even some ANC ministers, were having none of it. The Democratic Alliance (DA) was quick to trumpet its role, saying that, “The postponement resulted from our resolute opposition to the ANC’s plan to hike VAT at a time when millions of South Africans are already suffering under a cost of living crisis.” They proclaimed “a victory for the people” in the context of an ailing economy, high unemployment, and sustained poverty. 

The proposed VAT increase (from 15% to 17%) sparked significant debate with some analysts declaring it “not a big deal” considering that many mid- to high-income economies carried VAT rates of 20% and higher. Critics argued that the hike would be regressive, taking a larger percentage of income from the poor than the rich. The increase would also fuel inflation for goods and services and hinder economic growth. Your writer sits firmly in the critics’ camp and believs the poor will face financial hardship under a higher VAT regime regardless of government’s promise to increase the list of zero-rated basic goods. 

The R200,00 perspective

It is difficult to calculate the impact of VAT on the average household due to wide divergences in income sand expenditure patterns. Doing a basic calculation might cause well-to-do readers to scoff loudly; after all, a household that spends R10 000,00 per month on VAT-applicable items faces a mere R200,00 per month tax hike. You are challenged to reframe this argument in light of South Africa’s R350,00 per month Social Relief of Distress (SRD) grant, paid to around 9 million beneficiaries in 2024-25 at a budgeted cost to taxpayers of R33.6 billion. The point is that R200,00 is big money for a significant number of low income households. 

A too narrow focus on VAT deflects from more serious challenges in areas like governance and fiscal discipline. On the governance front, the ANC continues to show disdain for its GNU partners. As the DA lamented, the budget speech postponement was due to “failure by the ANC, and Finance Minister Enoch Godongwana, to engage meaningfully with alternative proposals.” Nothing new to see here, dear reader. After all, in the run-up to Budget 2025, the majority party pressed ahead with a range of contentious laws, ignoring objections by GNU partners. SA now boasts education, healthcare, and property rights laws that will surely be challenged on constitutional grounds. 

Jurgen Eckmann, Wealth Manager at Consult by Momentum was among a group of commentators who welcomed the postponement as an illustration of the GNU’s strengths. “The GNU is introducing more voices and perspectives into the decision-making process and ultimately promoting greater accountability,” he said. He was unmoved by the financial market volatility that coincided with the postponement. “The current uncertainty is temporary; when the budget is finally tabled in March, we will hopefully see a stronger, more balanced budget of consensus,” he said. “This is a true demonstration of a democracy.” 

Political gridlock fuels market volatility

Adriaan Pask, CIO at PSG Wealth, said that the financial market volatility following the budget postponement was indicative of the country’s political gridlock and uncertainty around its fiscal policy. “The FTSE/JSE All Share Index experienced a near 0.20% decline, reflecting investor concerns about political stability and the government’s ability to implement fiscal policies; at the same time, the rand depreciated by about 1% against the US dollar,” he wrote, in a brief media response. To be fair, neither of these moves can be considered excessive.

From a fiscal discipline perspective, the ruling party has repeatedly ignored calls to rein in expenses, proceeding on the basis that National Treasury and the South African Revenue Services (SARS) would somehow conjure up the necessary revenues to fund the welfare state. Last year, Treasury raided the so-called Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to the tune of R100 billion; but this year’s attempted VAT coup has been averted. As an aside, the GFECRA ‘raid’ also loosened up R25 billion in each of fiscal 2025-26 and 2026-27; it is amazing how quickly these extra billions get used up. 

The country’s growing debt burden is top of mind among economists. In a recent panel discussion, Annabel Bishop, chief economist at Investec, warned that South Africa was unable to generate enough revenue. “Over the past decade the trend has been for fiscal slippage or a worsening of government finances,” she said, adding that the debt to GDP ratio would settle at around 75% over the next three years. Others have warned against buying into this rosy (sic) debt picture because the ratio soars to around 95% when one factors in government guarantees for municipal and state-owned enterprise (SOE) borrowings. 

Rushing towards a fiscal cliff

Talking to Biz-News TV, Efficient Group CEO Dawie Roodt warned that South Africa was racing towards a fiscal cliff. He said the debt-to-GDP ratio was worsening, and that GDP growth remained poor. “The economic reality is that we simply cannot afford this massive state machinery anymore,” Roodt said, referring to the latest above-inflation wage increase for civil servants. To fix the country, he advocated a combination of reducing state spending and putting measures in place to get the economy to grow. 

The Finance Minister’s attempt to raise tax revenues via a VAT hike was dismissed as political suicide while proposals to raise corporate or personal income taxes were destined to fail too. After all, the Laffer Curve reminds us that beyond a certain point, higher taxes do not increase revenue; they just drive taxpayers away. So, how did we get here? And why did National Budget 2025 succumb to what is best described as ‘11^th hour political brinkmanship’? Early reports hinted that non-ANC GNU partners learned of the VAT increase very late in the process. 

DA leader John Steenhuisen cleared the air in another Biz-News TV interview. He said that GNU partners were aware of a R60 billion ‘hole’ in the budget in the week or two prior the scheduled budget presentation, and that the DA and other parties had strongly objected to a proposed increase in VAT to plug the shortfall. Unfortunately, the VAT solution worked its way into the final budget presentation. “The budget that was prepared to be tabled did not have buy-in and support from all parties; it was withdrawn and postponed to a later date so that we can come back with a pro-growth and pro jobs budget,” he said. 

South Africans are the winners, for now

The DA leader remained upbeat. “This shows that Parliament is no longer a rubber stamp [for one party]; if you want something done, you need consensus … South Africans were the winners from this development,” he said. 

According to Roodt, the postponement was “a political and economic watershed” and the only way forward was for the state to cut back on spending and implement pro-growth policies. But citizens will have to wait until 12 March for National Budget 2025 V2.0 to discover how government intends addressing its short-term budget crunch. Your writer hopes National Treasury follows Roodt’s advice by taking a knife to various expenditure lines. Time will tell. 

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