Economists weigh in on the controversial VAT increase in SA Budget

Banele Ginindza
Economists saw the step-up 0.5 percentage point VAT increase over the next two financial terms as not only messy, but an indication of government running out of headroom for revenue generation.

The increase, a compromise on an outright 2% VAT increase proposed in the deferred budget from last month, is proposed by Finance Minister Enoch Godongwana to raise R28 billion in 2025/6. It included a VAT increase of 0.5% from May 1, 2025, with a further 0.5% increase from April 1, 2026. South Africa is not out of line with the global average VAT rate.

Johann Els, the chief economist at Old Mutual Group, said, "Regarding VAT, the initial proposal of a 2% VAT rate increase has now been revised down to 1%, spread over two years - 0.5% from May 2025 and another 0.5% in April 2026. The revenue shortfall from this adjustment will be offset by the decision not to implement bracket adjustments for personal income tax.”

He further said there remains a strong commitment to fiscal consolidation, which is crucial. "The debt-to-GDP ratio is still peaking this year but is expected to trend lower thereafter. The primary surplus in this budget appears larger than what would have been proposed in the cancelled February 19 tabling," Els added.

Economists said while the VAT hike was anticipated, what has come as a shock is the decision to keep personal income tax brackets unchanged for the third consecutive year.

“With no adjustments for inflation, individual taxpayers will effectively pay more tax in real terms, leading to diminished purchasing power across the board. Adding to the dismay, a proposal to tax previously exempt foreign pension income is set to hit expatriates and returning retirees hard. These measures raise serious concerns about fairness and economic impact, with little upside benefit foreseen,” said Thomas Lobban, a director of Ibex Consulting, a division of Latita Africa.

Andrew Bahlmann, the chief executive of Corporate & Advisory, Deal Leaders International, said a VAT increase affects everyone, including the corporate sector, and government is mitigating the adverse effects for lower-income households, including through above-inflation increases to social grants, not increasing the general fuel levy, and expanding the list of foods zero-rated for VAT.

“Would have been better to have a 1% immediate increase – it is messy to have to spread over two years, albeit to soften the blow. The government clearly realised it could not overburden the country with a straight 1% increase in the rate of VAT. It consequently split the increase over two years, a move which is simply messy.”

PricewaterhouseCoopers economists said while the VAT increase is not favourable towards consumers, it is part of a drive by National Treasury to get fiscal finances under control. This, in turn, has positive effects for the economy and its people over the long term.

“While the increase in the VAT rate over the next two years will negatively impact local consumers, it is part of a strategy aimed at righting the country’s fiscal ship. This will benefit all South Africans, and especially the poor who are dependent on the government to find money for public services and social transfers,” said Mbai Rashamuse, PwC Southern Africa Tax and Legal Services Leader.

Lullu Krugel, PwC South Africa chief economist, said expanding the list of VAT zero-rated products has long been called for by private business and civil society as a way of supporting the financial situation of low-income households.

“Today’s announcement to expand the basket of goods to include more meat and other products that are widely consumed in the lower expenditure deciles is welcomed with open arms in light of the impending VAT increases. It is now incumbent upon the producers and retail sector to ensure that these adjustments are passed on to the consumer,” Krugel said.

 Izak Odendaal, the Chief Investment Strategist at Old Mutual Wealth, said , “This appears to be a relatively good (proposed) Budget from an investor’s point of view with an emphasis on fiscal consolidation and economic growth, but taxpayers have to cough up, with VAT increases and no bracket creep relief. The most notable and contentious item is the 0.5 percentage point VAT increases proposed for this year and next. These are not supported by the DA. Therefore, the debate will now move to Parliament where compromises must be reached, potentially adjusting the proposals."

“Retirement annuities  and retirement funds remain effective tools for reducing your income tax liability. Tax deductions are allowed for contributions of up to 27.5% of the greater of remuneration or taxable income, capped at R350 000 per year. These assets also remain exempt from Estate Duty, unless you have disallowed contributions,” said Tiaan Herselman, the head of Advice and Proposition at Old Mutual Wealth, noting SA Revenue Service received R3.5 billion to enhance its High-Net-Worth Individuals Unit, though no wealth tax decision has been finalised.

“The projected budget deficit numbers and the forecast for debt peaking sooner than previously anticipated is good for local bonds as well as the local currency. Furthermore, this budget confirmed that the days of easy funding for SOEs (state-owned enterprises) are firmly behind us, and Treasury will be implementing a much tougher stance on any SOE support,” said Victor Mupunga, the head of Research at Private Clients by Old Mutual Wealth.

“A lot of the bad news has already been priced into bonds and long-term yields if held to maturity still have value relative to other emerging economies. A more viable and welcome approach to increasing revenue is the proposed infrastructure bonds,” said Kim Rassou, the head of Old Mutual Multi-Managers.
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