The latest VAT flip-flop does not mean consumers are off the hook
Gareth Stokes
South Africa’s 2025 National Budget saga goes way beyond the half-a-percent-point VAT hike and subsequent recant to a deeper investigation of political expedience over common sense. Taken at face value, consumers may have dodged a tax bullet, but the cost will find another path to reach them by. Allow your writer some column inches to explain.
Keeping the boss happy
Going back decades, South Africa’s Finance Ministers have taken instruction from a dominant African National Congress (ANC) that is obsessed with rewarding patronage and protecting its political majority. Neither of these objectives sit well with reducing state expenditure. So, whenever a Finance Minister suggests austerity, the kickback is intense.
Cutting costs by streamlining the state machinery elicits a hard “no” response. The ANC has to maintain a heavy municipal, provincial, and national governance structure alongside hundreds of state-owned enterprises (SOEs) to keep its most committed cadres gainfully employed. So, cutting departments is out. And you cannot achieve savings by reining in the always-above-inflation public sector wage agreements either. This is because the ANC cannot risk disenfranchising the two million-odd public sector employees who may punish any unfavourable wage decisions at the polls.
Entering 2025, after multi-year attempts to rein in state expenditure, our Finance Minister concluded that raising taxes was the only way to go. His starting position was for a two percentage point increase in the VAT rate, from 15% to 17%, from 1 April this year. When non-ANC Government of National Unity (GNU) partners got wind of this proposal, they caused such a ruckus that the February 2025 Budget speech had to be postponed until March. When the Minster eventually delivered the speech, he stuck to his tax-over-austerity guns, announcing two half-a-percentage-point hikes from 1 May 2025 and 1 April 2026 respectively.
What the GFECRA?
He may have hiked VAT sooner, except last year he was able to raid the country’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to the tune of R250 billion. R100 billion was transferred to a contingency reserve account at the South African Reserve Bank (SARB) to bolster solvency and manage potential exchange rate fluctuations. The remainder was used to reduce government borrowing and manage debt levels over three years ending 2027/28.
PS: your writer has resisted the temptation to unpack the financial impact of the timing of this deal, given gold’s resurgence from around USD2000,00 per ounce then to USD3500,00 presently.
Unfortunately for the Minister, the noise around the VAT hike would not settle, forcing an abrupt about-turn. In a media release dated 24 April 2025, National Treasury rescinded the hike, citing “extensive consultations with political parties” and the advice of parliamentary committees. Fair comment, but somewhat nonsensical in the context of more than two months having passed since the proposal was first made. The Minister and / or National Treasury could have backed down in March, rather than taking business and consumers to the very precipice of the 1 May hike implementation day.
Treasury estimates the shortfall from keeping VAT at 15% to be in the region of R75 billion over the medium term, or R25 billion annually. And the Minister has already withdrawn the Appropriation and Division of Revenue Bills in order to rebalance state incomes and expenditures over the coming three years.
Taxpayers will shoulder the burden
“The VAT decision postpones rather than resolves the R75 billion revenue gap,” said Boipelo Ndimande, CFO at Consult by Momentum. The uncomfortable truth is that taxpayers will bear the pain whether the shortfall is plugged on the income side, through higher taxes, or through expenditure cuts that result in reduced government-funded services or the deferment of infrastructure projects. Ndimande urged the country’s businesses and consumers to prepare: “Now is a good time to review your budgets, trim unnecessary expenses, and seek guidance from a qualified financial adviser.”
Your writer has two issues with this tax revenue collection grandstanding. The first is that government could easily have ‘replaced’ the R13.5 billion or so that 0.5% VAT would bring in by cutting wasteful and unnecessary expenditure from its R2 trillion budget. This point was made clear by retired judge and tax expert Dennis Davis in comments to Business Day. South Africa’s Organisation Undoing Tax Abuse (OUTA) has been vocal around the issue too, saying that “the debacle that has flowed since the February announcement could have been avoided through better collaboration and meaningful proactive engagements between GNU partners…”
A useful tool, but…
OUTA acknowledged tax increases as a tool for stabilising government finances but was critical of a government with “a history of fiscal mismanagement, high levels of debt, and corruption.” The organisation said an increase in tax was imprudent absent evidence of improved responsible spending and a significant reduction in the extent of wasteful expenditure.
“We maintain that South Africa does not have a revenue problem, we have a spending problem,” said OUTA CEO Wayne Duvenage. “Unless we cut waste and corruption, tax increases like VAT are indicative of government’s inability to reform.” It is a spending problem that your writer has ranted over for decades. Instead of being reassured by the VAT hike flip-flop, your writer offers five suggestions that government might onboard to get South Africa’s finances back on the straight and narrow.
One, scrap the unaffordable NHI. Two, limit public sector wage hikes to inflation, and start reducing the increases offered to high earners to narrow the wage gap. Three, shut down one or two (or heck, why not a dozen or more) of the perennially underperforming SOEs. Four, dissolve the surplus ministries created under the GNU, and align power to actual share of vote. And five, for an easy win, cut most of the R2.9 billion per annum SAPS VIP Protection Unit budget and let the elected experience our daily crime-ridden reality.
You cannot bank on austerity
It seems OUTA is not holding its breath for austerity to happen. The organisation suggested the South African Revenue Service (SARS) should be better resourced to collect more tax revenue. “Strengthening SARS is essential to ensuring that funds that might otherwise have been lost to tax evasion, illicit financial flows, and non-compliance are now collected and directed into the national fiscus,” they wrote. So, even if government fails to tackle waste, they can throw a bit more of taxpayers’ money at SARS to collect more from, you guessed it, the taxpayer. Whether you label it an expenditure overrun, or a revenue shortfall, consumers and businesses will pay.
The second issue is that the back-and-forth dithering over a VAT hike has cost VAT-registered businesses thousands through systems changes to facilitate the increase and communications to inform consumers of same. Implementing a VAT change is not as simple as typing 15.5% into a VAT field somewhere on the cloud. Businesses have to run countless checks and tests to ensure that the VAT change is applied accurately across all business units. You will struggle to find a more tangible example of how policy uncertainty impacts the bottom line than this VAT-on, VAT-off debacle.
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