VAT hike could undermine Budget boost for health and education, say civil society groups

Civil society organisations have warned that an increase in the value-added tax (VAT) rate could “erode” the impact of the increased Budget allocations for the health and education sectors.

Budget Justice Coalition (BJC) researcher Lisa Higginson, in a presentation to the National Council of Provinces’ (NCOP’s) Select Committee on Appropriations on Wednesday, said that while the 2025/26 Budget demonstrated a shift towards better resourcing of social sectors, “allocations still fall short of needs”.

“We are encouraged to see the shift away from harmful spending cuts and, like others have said, concerned that this was only made possible by a regressive VAT increase. And we feel as though National Treasury has failed to adequately engage with the alternatives provided,” said Higginson.

“If the VAT increase is approved, this will have an impact on social spending — as we know, many of the departments that we’ve spoken about today have considerable goods and services budgets, and this will erode the buying power of those allocations. If it is removed, we question how this will impact the Division of Revenue Bill.”

She added that while the Budget was a “step in the right direction, it still fails to deliver a framework that adequately responds to persistent socioeconomic challenges, and is unlikely to support inclusive growth.”

Read more: VAT court challenge stays; Treasury may drop increase: Three future GNU scenarios for SA

The BJC consists of 23 civic organisations, including Equal Education, SECTION27, Youth Capital, the Public Service Accountability Monitor and Amandla.mobi.

The social justice organisations on Wednesday presented their submissions on the Division of Revenue Bill and the Appropriation Bill in public hearings held by the NCOP’s Select Committee on Appropriations.

The Division of Revenue Bill outlines how funds will be divided between the national, provincial and local governments, while the Appropriation Bill allocates money to specific departments and programmes, and determines how much the government can spend on areas like salaries, and goods and services.

The consideration of both Bills comes after the National Assembly and the NCOP have discussed and voted on the fiscal framework.

The Appropriation Bill is the last legislative step in the process, and by law, it must be passed by Parliament within four months of the start of the financial year — by 31 July, according to a News24 report.

Read more: Take VAT! GNU comes unstuck as fiscal fracas plays out in National Assembly

Parliament spokesperson Moloto Mothapo told Daily Maverick the Division of Revenue Bill must be passed by the National Assembly 35 days after the adoption of the fiscal framework and revenue proposals. The scheduled date for considering the Bill is 6 May.

The National Assembly will then consider the Appropriations Bill on 10 June, so that the NCOP has time to process it before 31 July.

“In terms of the law, Parliament must process and pass the Appropriation Bill within four months from the start of the new financial year,” he said.

‘It is not too late to course correct’

In a presentation to MPs, SECTION27’s budget analyst, Matshidiso Lencoasa, said that while the organisation welcomed the Division of Revenue Bill because it “is moving away from years of defunding education and healthcare”, its main issue was the 0.5 percentage point VAT increase in the fiscal framework.

“It is not too late to course correct,” she said.

“As we’ve seen in 2018, it [an increase in the VAT rate] caused an increase in inflation, so the rising costs that are due to a VAT increase may likely erode the impact of increased allocations to schools and health facilities.”

Lencoasa urged the committee members and the National Treasury to explore sources for alternative revenue generation that were proposed in submissions on the fiscal framework.

However, this comes as Finance Minister Enoch Godongwana said he saw no alternative to the tax increase at the centre of the Budget impasse that is pushing the Government of National Unity (GNU) to the brink, according to a Bloomberg report.

The fiscal framework was passed with the help of political parties outside of the GNU, including ActionSA and Build One South Africa (Bosa), on the condition that there are talks to explore alternatives to the VAT hike.

Both ActionSA and Bosa have threatened to withdraw their support if the ANC doesn’t keep its promise to find alternatives to a VAT increase within 30 days.

Meanwhile, the DA is challenging the adoption of the fiscal framework and Godongwana’s powers under the VAT Act in court. The EFF has since applied to intervene in the case, which is set to be heard in the Western Cape High Court next week.

Read more: The VAT hike and the teetering GNU — a lose-lose situation for South Africans

‘Real increases in education and health funding’

“While we reject the fiscal framework that was passed, we do welcome the Division of Revenue Bill and real increases in education and health funding,” said Lencoasa.

“Previous years of budget cuts towards education and healthcare sectors have caused constraints on the ability of our public sector to provide quality basic education and healthcare. We’ve seen fewer doctors, nurses and teachers being hired and retained, and service delivery has worsened,” she said.

Overall, the health budget grew from R277-billion in 2024/25 to R298.8-billion in 2025/26. Read Daily Maverick reporter Tamsin Metelerkamp’s analysis on the improved funding for health here. DM