Shock VAT hike was set to bite as Treasury runs out of policy options

In an unprecedented move, Finance Minister Enoch Godongwana's Budget Speech has been delayed. Chaos ensued on Wednesday when National Assembly Speaker Thoko Didiza announced: “Cabinet, therefore, decided not to come and do a presentation of the budget”, stating a return on Wednesday, 12 March. The development sent the rand into a tailspin, triggering turmoil in the Government of National Unity. Treasury has since lifted the embargo on the details that would have been presented. The sticking point has been the VAT hike. Here is what we would have reported had the increase gone ahead.

A shock VAT hike as Treasury strives to lift spending while containing swelling debt levels is set to trigger howls of protest from business and consumers. 

Unveiled in the 2025/26 budget on Wednesday by Finance Minister Enoch Godongwana, the VAT will be raised by two percentage points to 17%, inflicting an unwelcome burden on struggling South African households who have recently enjoyed some relief in the form of slowing inflation and falling interest rates. 

What monetary policy giveth, fiscal policy taketh away.

The last time VAT was increased was in the 2018/19 financial year, from 14% to 15%.

Commenting on the increase, Godongwana acknowledged that such a move carries political risk. 

“Most political parties would probably be scared, no one wants to lose their base. There will be a great deal of negotiation to manage that political risk,” he told journalists at a press conference before his Budget speech. 

Ultimately, Treasury is aiming for public debt levels to peak in the current 2025/26 financial year at 76.1% of gross domestic product (GDP) and then slowly ebb to 66.8% by 2032-33 – pointedly far above the 60% debt-to-GDP ratio recommended by the International Monetary Fund (IMF). 

“Our fiscal strategy remains on track. This Budget reaffirms government’s commitment to raise living standards, expand infrastructure investment and stabilise debt,” Godongwana said in his speech. 

That remains to be seen and perhaps no Budget in the democratic era has been delivered against the backdrop of such high levels of geopolitical and global economic uncertainty. 

The government is stuck between a rock and a hard place of its own design. From the heady days of the Mbeki administration, which produced budget surpluses and relatively fast economic growth, the fiscal climate has steadily worsened, and policy options are now few and far between.  

The government simply cannot take a chainsaw to expenditure in an Elon Musk-style slash-and-burn policy. But with no overall cuts on the board, additional revenue has to come from somewhere, and the debt tap threatens to become a debt trap. 

Consolidated government spending is set to rise by an annual average of 5.8%, from R2.4-trillion in 2024/25 to R2.84-trillion in 2027/28. 

The consolidated Budget deficit for 2024/25 is projected at 5% of GDP compared with 4.5% in the 2024 Budget, a reflection of slower-than-expected economic growth. The deficit is projected to decline to 3.4% of GDP in 2027/28 as the main Budget deficit narrows.

Treasury, as usual, is banking on the pace of economic growth accelerating to fit its square expenditure targets into the round hole of revenue without things going pear shaped. 

GDP growth is seen quickening to 1.9% in 2025 from an estimated 0.8% in 2024, then slowing to 1.7% in 2026. 

Gross capital formation – a key measure of investment – is seen rising 5.0% in 2025 but from a low base after an estimated contraction of 3.6% in 2024. 

“To address its biggest social challenges and improve the quality of life in the country, South Africa needs faster economic growth and more jobs created… The 2025 Budget makes strategic investments to achieve faster economic growth,” Godongwana said. “An estimated R1.03-trillion will be spent over the next three years on infrastructure projects.” 

With pothole-riddled roads, the indignity of pit latrines still scarring many schools, Transnet’s woes, water shortages and collapsed sewerage systems, South Africa’s infrastructure reeks of state failure. 

It will be vital to ensure such spending is not squandered or stolen and delivers the goods, and an increased role for the private sector on this front would relieve the government of some of the burden.  

VAT pain, little gain