The unprecedented postponement of the tabling of South Africa’s 2025 budget because of disagreement within the coalition government over a two percentage point increase in value added tax (VAT), highlights the country’s dilemma.
The government needs to raise revenue to deliver on its constitutional obligations. But in a context where the global outlook is uncertain and unpredictable, trade-offs are required.
South Africa has a deficit of around 4.3% of GDP, accounting for R377 billion (US$20,479 billion). According to the Unpublished budget review public debt stands at 76.1% of its GDP.
Whereas the public debt as a percentage of GDP is in line with that of similarly sized economies, its debt servicing costs are considerably higher. The country pays around 5% on public debt interest as a share of GDP while developing and upper-middle-income countries pay, on average, 2.2% and 1.8% respectively.
These figures point to why the finance minister wanted to raise more revenue. Treasury’s estimates in the 2025 unpublished Budget Review were that the increase in Vat and other tax adjustments plus factoring in tax foregone due to expanding the basket of zero-rated goods would have brought in an additional R58 billion (US$3.1 billion) for the 2025/26 financial year.
To date, debates around previous years’ budgets have mostly been about expenditure, with very little scrutiny of the revenue side. Not since the 2013 Davis Tax Committee has there been public debate about reforming the tax policy.
Based on our academic research we believe the crucial question around tax reform is: who will bear the burden of the reform? And how taxes connect to the promise of the South African social compact. The social compact since democracy, expressed in the constitution, promises to uphold the rights of all citizens.
Evidence shows that increases in the rate of VAT affect poor households more, particularly women-headed households.
While the government is concerned about financing its budget and being able to raise the resources needed to make the state work, a rethink is needed about who must bear the burden of raising the money.
The cost of food
VAT is a flat tax on consumption of goods and services, usually paid by the end consumer. It affects lower income households more because they spend a greater share of their income on goods such as food, electricity and water.
The uproar over the recent proposed increase is therefore not surprising.
At least 34% of the yearly income of poor households is spent on food and groceries. Almost 50% of South Africans live under the poverty line. This is where the impact will be felt in a number of ways.
Firstly, the net effect of an increase in VAT will mean that mean that already financially stretched households will be paying more for food. This comes on top of
food inflation was 8% between 2023 and 2024.
Secondly, meagre increases in social grant payments in the last decade – over 28 million grants are paid out every month – have not kept pace with inflation.
One of the largest grants is the old age pension grant. There are around 3.9 million beneficiaries. It amounts to R2,190 (US$118) a month for those between 65 and 74 years and is the sole source of income for many families.
Between 2023 and 2024 this grant increased by R110 (US$5.45) – a 5.2 % increase, while inflation stood at 4.5%. However, after taking into account inflation, the grant amounts to R2,091 (just over US$107), having the net grant increase (after adjusting for inflation) of meagre R11 (the grant was in 2023 R2.080).
A VAT increase would raise their cost of living for working-class South African households (those earning between R8,000 (US$432) and R22,000 (US$1,188) a month) too. This cohort is already using 67% of their income to cover their debts. Middle class households (earning between R22,000 (US$1,188) and R35,000 (US$1,893) a month) use 69% of their income to cover their debts. A VAT-induced increase in the cost of living may push some to neglect servicing debt to maintain their living standards.
If middle and working class households defaulted in large numbers on their debt obligations, a vicious cycle might unfold.
Firstly, banks and financial institutions might face significant losses due to unpaid loans. This could trigger an economic recession as consumption could fall, leading to lower revenue collection. This could increase government debt as the state might need to bail out banks or get loans to cover the revenue shortfall. The result would be a credit downgrade which might make it more expensive to borrow money on international markets.
In a country with such a limited and vulnerable tax base (in 2024, only 7.4 million people of 63 million paid income tax) these risks should not be taken lightly.
Wealthy South Africans
Wealthy South Africans will not be as badly affected by an increase in VAT. Their consumption as a share of their incomes is less. Yet they remain central to the government’s dilemma about raising money from taxes. That’s because taxing wealthier South Africans will result in a push-back, and in some cases put a strain on struggling companies and industries that are central for job creation.
However, the most likely reason a VAT increase was chosen as opposed to a higher income tax for high income earners, taxes on capital gains, or taxes on wealth is that the government knows the wealthy elites (including those in government) will oppose increases taxes targeted at them. They are more organised and have more leverage over the government than vulnerable households.
What next?
The government needs to spend money properly and meet its constitutional obligations. And corruption must be reduced.
What the standoff over the VAT increase has highlighted is that, if South Africa aims to be a society where everyone actually counts, it should place the well-being of all its citizens at the forefront. This should be the principle that informs the process of raising the resources needed to drive future.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
