Finance Minister Enoch Godongwana. Photographer: Dwayne Senior/Bloomberg via Getty Images
Finance Minister Enoch Godongwana on Wednesday announced a VAT increase of one percentage point over two years, halving the size of the unpopular measure that saw him forced to abandon his initial budget in February for lack of political support.
A hike of half a percentage point will be implemented from 1 April, followed by another in the next financial year, which will bring VAT to 16% in 2026. Godongwana also opted not to adjust personal income tax brackets for inflation for the second year in a row, reversing his initial decision in this regard last month.
The adjusted tax proposals follow three weeks of bitter wrangling in the ruling coalition over his plans for a VAT hike. The debate continued late into Tuesday as President Cyril Ramaphosa briefed fellow leaders of political parties in the government of national unity on the minister’s plans.
A cabinet meeting shortly before the tabling of the budget ran into overtime as the contestation continued.
The Democratic Alliance (DA), the ANC’s biggest coalition partner, has remained adamant that it would not support any VAT increase, leaving open the question of whether it will vote for the revised budget or force a parliamentary amendment of the fiscal framework in the next fortnight.
This has never happened in the past, but taxation changes cannot be implemented without the legislature’s approval and the ANC alone no longer has the numbers to provide it after losing its majority last May.
DA leader John Steenhuisen reiterated minutes before the minister delivered his speech that his party will not support the budget in its present form.
Godongwana has remained equally adamant that the treasury could not meet spending pressures as well as its critical debt consolidation target without finding more revenue.
The treasury expects 2024 tax revenue to reach R1.85 trillion, about R16.7 billion less than forecast last February, mainly as a result of a 20% decline in import VAT collection.
In a media briefing shortly before his budget speech on Wednesday, the minister sought to cast the DA’s opposition to the VAT hike as an attempt to extract political concessions after losing coalition battles over the National Health Insurance Act, the Basic Education Laws Amendment Act and the Expropriation Act.
He said the party has indicated in private discussions with him that they would support the new VAT increase under certain conditions. These are understood to include a comprehensive review of government expenditure.
“It is not about the VAT increase, it is about a whole lot of grievances they have.
“Therefore they want to win something. It is important that we call a spade a spade,” he said, adding that he expected the debate to continue in parliamentary committees from Friday but this was not his immediate concern.
“Today I table and walk away.”
The minister’s main justification for the initial VAT increase he proposed — the first since 2017 — was finding R60 billion to replenish the education and health budgets and provide urgent support for passenger rail. The revised increase, plus leaving personal income tax brackets as is, will generate R28 billion in 2025-26 and R14.5 billion in 2026-27, he said on Wednesday.
Additional tax proposals include not adjusting medical tax credits for inflation, leaving the fuel levy unchanged and sharply increasing so-called sin taxes.
The health and education budgets will still grow by an annual 5.9% in the medium term, and the budget still allocates R19.2 billion to the Passenger Rail Agency of South Africa in the medium term for critical upgrades. But the price for a smaller VAT increase will include smaller increases in social welfare grants.
Although these will still rise at above the inflation rate and the budget still sets aside R35 billion for the extension of the social relief of distress grant, the older persons grant will now increase at R130 instead of R150 a month, and the child support grant will increase by R30 instead of R50.
“It was really a function of the size of the VAT increase,” Godongwana told the media.
Consolidate spending will increase at an annual rate of 5.6% over the medium term to R2.83 trillion in 2027-28.
Gross loan debt is set to stabilise at 76.2% of GDP in 2025-26, thanks to a primary budget surplus. It is 0.1% higher than the figure Godongwana gave in the budget he had prepared for February. The consolidated budget deficit is projected to narrow from 5% in the current year to 3.5% in 2027-28.
Debt service costs will amount to R389.6 billion in the current year.
Attempting to put that figure into context in his speech, Godongwana said: “It is more than what we spend on health, the police and basic education.”
The treasury said the debt-stabilising main budget primary surplus will serve as the fiscal anchor, with larger primary surpluses planned for the remainder of the decade to reduce debt as a proportion of GDP.
It has published a discussion document on potential future options for fiscal anchors along with the budget on Wednesday.
“The assessment of fiscal anchors is based on the premise that governments should make revenue or expenditure choices that are affordable without compromising important social and economic programmes for future generations,” it said.
The treasury adjusted its growth forecast for 2025 to 1.9%, after averaging less than 1% over the past four years. Godongwana said the economy grew by only 0.6% in 2024.
This was because of third-quarter contraction driven mainly by the weaker than expected performance of the transport and agriculture sectors, the latter battered by disease and drought.
“As much as the debate has been dominated by the proposed increase to value-added tax, the bigger debate must be about how we grow the economy for the benefit of the majority.”
Growth is forecast to average 1.8% over the medium-term, underpinned by increased household consumption and moderate employment recovery.
The treasury warned of downside risks in the global outlook, notably trade disputes and geopolitical tensions, financial market volatility, rising commodity prices and tightening financial conditions for developing economies.
Consolidate spending will increase at an annual rate of 5.6% over the medium term to R2.83 trillion in 2027-28. The budget allocates an additional R46.7 billion for critical infrastructure projects, R35.2 billion to extend the social relief of distress grant for another year and R8.2 billion to increase social grants in line with inflation.
An additional R23.4 billion has been allocated over the medium term to fund public service wage increases. A three-year wage deal provides for an increase of 5.5% in 2025, at a cost of R7.3 billion, followed by inflation-related increase in the next two years.
The treasury confirmed that the government will partially draw down on the contingency reserve to foot the bill.
The budget provides for additional funding of R46.7 billion for infrastructure spending.
After a public spat over the wisdom of new tax increases, the treasury has agreed to let the South African Revenue Service an additional R7.5 billion over the medium term to modernise its operations to combat tax evasion and improve collection