Increasing value-added tax shifts the weight of systemic dysfunction to households already buckling under the pressure of inflation and economic exclusion. (Delwyn Verasamy, M&G)
Next month, South Africans will wake up to an increase in VAT — a policy decision that will reverberate through wallets, dinner tables and the very fabric of an already strained society. While the treasury argues that the hike is necessary to address a growing budget deficit, this move is less about responsible governance and more about avoiding hard truths.
VAT, by design, is a regressive tax. It takes a greater percentage of income from the poor than the rich, placing disproportionate pressure on low-income households. For millions of South Africans, this is not an abstract policy debate — it’s a question of survival.
As the cost of staple items such as bread, cooking oil and fuel increases, the knock-on effect is devastating: reduced consumption, rising hunger and deepening poverty. It is the daily grind of deciding whether to buy electricity or lunch. And in a country where more than 28 million people rely on some form of social assistance, even a marginal VAT hike hits like a hammer.
The National Poverty Lines (NPLs), developed to track money-metric poverty in the country, tell us just how fragile life is for many. As of 2024:
| Poverty Line | Monthly Value (per person) |
|---|
| Food Poverty Line (FPL) | R796 |
| Lower-Bound Poverty Line (LBPL) | R1,109 |
| Upper-Bound Poverty Line (UBPL) | R1,634 |
(Source: Statistics South Africa, 2024. P03101)
These figures reflect the daily financial limits under which millions live. An increase in VAT, even by a small margin, can push households teetering near these lines deeper into deprivation.
NPLs serve as a critical benchmark in developmental economics. They help identify which segments of the population are unable to meet minimum living standards, guiding targeted social and fiscal policies. The lines are composed of both food and non-food components and are adjusted regularly using the CPI to account for inflation and changes in household consumption patterns. The last rebasing occurred in 2015, with an update expected in the 2026-27 financial year, based on the Income and Expenditure Survey (IES) 2022/2023.
This increase comes at a precarious moment. According to the World Bank’s recent Macro Poverty Outlook for South Africa, the country’s:
- Unemployment rate sits at a staggering 32.4%;
- Public debt has risen to 74.1% of GDP, up from 38.2% in 2008;
- Real income per capita has regressed to 2007 levels; and
- Average annual GDP growth from 2014 to 2023 was just 0.8%
(Source: World Bank, 2023. Macro Poverty Outlook: South Africa)
Policymakers continue to frame the VAT increase as a necessary evil. But that logic wears thin when juxtaposed with the state’s failure to curb wasteful expenditure, address rampant corruption or craft bold strategies to stimulate job creation.
South Africa already holds the grim title of one of the most unequal societies in the world, with a Gini index of 63.0 — a number that reflects deep-seated disparities in income and opportunity (Source: World Bank, 2023). By raising a tax that hits everyone equally but hurts the poor disproportionately, the government threatens to widen this gap even further. And herein lies the contradiction: the very revenue generated from VAT is justified as a tool to support poverty alleviation programmes — yet the act of collecting it deepens poverty for those it claims to serve.
What should be done instead
1. University-Government Partnership for Youth Entrepreneurship
To enhance the effectiveness and sustainability of entrepreneurship education, a practical business development model inserted directly into the academic curriculum. This model shifts the focus from theoretical instruction to real-world application, ensuring that students graduate with more than just knowledge — they graduate with operational businesses.
As part of the curriculum, students should be tasked with launching businesses as a practical component of their studies. These businesses will not only act as platforms for applied learning but will also serve as contributors to the local and national economy.
To ensure long-term sustainability and strategic support, the university could retain a minority stake in these businesses. This is not intended for profit-generation, but rather to:
- Provide ongoing mentorship and strategic oversight;
- Ensure reinvestment into the entrepreneurship programme, and
- Foster continuity of the businesses beyond the academic period.
These student-founded businesses can also operate as work-integrated learning environments, creating opportunities for other students to gain hands-on experience through internships, part-time employment or project-based contributions. In this way, the businesses remain operational and evolve into sustainable ventures even after the original founders graduate.
2. Equitable tax system
To create a more equitable tax system and relieve financial pressure on lower-income citizens, the government can implement a set of targeted and progressive tax reforms. One such reform is a progressive capital gains tax, where higher earners pay a significantly larger portion on profits from investments and asset disposals. This not only ensures that those earning from wealth contribute their fair share but also promotes long-term, productive investment over short-term speculation.
Additionally, increasing estate and inheritance taxes on large inheritances and high-value estates can curb the concentration of wealth across generations and foster social mobility, addressing intergenerational privilege. A second property and vacant land tax can also be introduced, targeting people who own multiple properties, especially those that remain unoccupied or are held for speculative purposes. This discourages land hoarding and encourages better land use, potentially unlocking more space for housing and local development.
3. Infrastructure and blended finance
A targeted approach to infrastructure financing is essential for national development. The government should work with development finance institutions, pension funds and commercial banks to raise the targeted R100 billion in infrastructure investments. By employing blended finance mechanisms — which combine grants, equity, and concessional loans — projects become more attractive and less risky for private investors. This model can be particularly effective for transport, energy, and housing initiatives.
4. Youth and SME funding ecosystems
Small businesses and start-ups remain at the heart of job creation. The establishment of a government-backed innovation fund focused on high-impact industries such as fintech, green energy, and agritech can spur youth entrepreneurship and unlock employment opportunities. In addition, a streamlined platform for small and medium businesses to access funding should be developed, eliminating bureaucratic bottlenecks and allowing for faster, more equitable disbursement of resources.
5. Digital economy expansion
South Africa has an opportunity to lead on the continent by scaling its digital services and export capabilities. Expanding sectors such as business process outsourcing and remote digital work can create significant forex inflows and employment, especially for young professionals. Parallel to this, investment in future-ready skills — including artificial intelligence, cybersecurity and robotics — will prepare the workforce for global competitiveness in emerging industries.
6. Municipal reform and utility management
Municipal revenue models need to be restructured to ensure financial sustainability. Equitable billing systems, improved collection mechanisms, and enhanced accountability are essential. Moreover, critical utilities such as water and electricity should be professionally managed through independent entities to ensure efficient service delivery and to attract private and public investment in essential infrastructure.
7. Sustainable income support mechanisms
The social relief of distress grant should be transformed into a sustainable income support model with clear pathways to employment or entrepreneurship. This can be complemented by establishing one-stop economic support centres where unemployed citizens can access skills training, job placement services and funding — all under one roof. These centres would streamline service delivery and enhance the efficiency of government support.
The proposed strategies offer a comprehensive, multidimensional approach to stimulating economic growth, creating jobs and financing infrastructure — all without increasing VAT.
Duduzile Sithole is the founder and managing director at Mpendulo Legacy Group, a company dedicated to providing business development and consulting services to help organisations grow and operate effectively.