VAT increases pose a real threat to economic growth and human rights

Human Rights Day provides South Africans with an opportunity to reflect on the human rights and economic progress achieved over the years. However, it also compels us to confront the gains that are steadily being eroded.

One such challenge is the proposed Value Added Tax (VAT) increase by the ANC in the Government of National Unity – a move that threatens both businesses and consumers, with far-reaching economic and human rights implications.

Read more: Experts welcome expanded VAT-free foods basket but warn effects will be reversed by electricity hike

A VAT increase is not merely an economic policy adjustment – it is a regressive measure that disproportionately affects lower-income households and struggling businesses.

In an economy that is already stagnant, with high unemployment rates and rising living costs, increasing VAT further burdens consumers who are barely managing to make ends meet. Rather than fostering economic growth, this measure risks deepening inequality and stifling market participation.

The negative consequences of a VAT increase are profound and multi-faceted. The most immediate impact is the rise in the cost of goods and services, triggering inflationary pressures. Higher prices discourage consumer spending, particularly on non-essential items, leading to reduced demand in the economy.

Instead of boosting tax revenues, this move is likely to further suppress economic growth, undermining the very objective the government seeks to achieve.

For businesses, reduced consumer spending translates into lower sales, leading to inventory build-up and severe cash flow constraints. Many businesses will struggle to meet their operational expenses, including rent, wages and supplier payments. Faced with declining revenue, companies may be forced to downsize, further exacerbating the unemployment crisis and deepening economic distress.

A downturn in business activity will also have a direct impact on the property sector. Office and retail spaces in urban centres could experience increased vacancy rates, reducing property values and discouraging further investment.

Landlords, desperate to recover lost income, may resort to renting out properties to illegal occupants, contributing to urban decay and law enforcement challenges, as witnessed in parts of Johannesburg. The economic cost of illegal occupancy and informal property use extends beyond financial losses – it weakens urban infrastructure, erodes safety and further entrenches economic instability.

A VAT increase may also drive more businesses and consumers into the informal sector, where economic activity is largely untaxed and unregulated. When taxation becomes excessively burdensome, individuals and businesses seek alternative ways to survive—often by circumventing legal and fiscal obligations.

This shift would not only undermine the formal economy but also reduce government tax revenues in the long run. Instead of broadening the tax base, the VAT increase risks creating a vicious cycle in which declining tax compliance leads to further tax hikes, worsening the economic climate.

VAT increases result in decline in consumer spending— SARB study