VAT increase versus spending cuts: South Africa’s budget dilemma explained
The discussion comes at a time of heightened uncertainty following the unexpected postponement of the national budget. With the ANC-led Government of National Unity struggling to reach consensus, a last-minute political standoff over the VAT hike derailed the budget process entirely.
Els examined the broader economic imperatives behind the need for increased revenue, while Manyike highlighted the strain a VAT hike could place on already stretched consumers. Their insights, explored below, reveal the difficult trade-offs policymakers must navigate in an increasingly fragile economic and political landscape.
According to Els, “Tax increases are never ideal, but we must keep an eye on the bigger goal of fiscal consolidation. In a fragile economy, it’s crucial to strengthen public finances in a way that appeals to investors and credit ratings agencies. This might not be pleasant in the short term but may be necessary for South Africa’s long-term economic prospects. If the government chooses not to raise VAT, we could see severe spending cuts that jeopardise critical areas like health, education, or social grants. One has to decide which route is ultimately the least damaging.”
Balancing tax trade-offs
It must be noted that the VAT increase was going to be mitigated by a range of other factors that National Treasury considered including, a higher than inflation increase in social grants, no fuel levy, extra zero-rating of meats and tinned vegetables amongst others,
Els also noted that the current debt-to-GDP ratio hovers at around 75%, necessitating firm steps to rein in deficits. He emphasised that a higher VAT rate spreads the tax burden more widely, unlike targeted hikes in personal income tax that can drive high-net-worth individuals to seek avoidance strategies or even leave the country. From an investment perspective, demonstrating fiscal discipline could trigger positive reactions in the form of improved credit ratings, enhanced foreign inflows and eventually greater economic stability.
Though he supports the principle of strengthening the fiscal position, Els acknowledged the plan’s potential drawbacks. He pointed out that nothing is final until the new budget is tabled, saying, “Ultimately, Parliament may still opt for a different mix of tax increases and expenditure cuts. The proposed 2% VAT hike is just one potential tool in the box. Either way, the government must present credible policies that reduce the deficit. If it doesn’t come from indirect taxes, it has to come from direct taxes or from cutting essential services, both of which could have deep social consequences.”
Consumer cost concerns
On the other side of the coin, Manyike, focused on the real-world implications for consumers, particularly those already under strain from high unemployment rates and low-income levels. He argued that any increase in VAT warrants serious scrutiny regarding its impact on household finances.
“Millions of South Africans live in poverty or are reliant on social grants as their primary source of income. Even a relatively small adjustment in VAT can shrink disposable income significantly, especially for those who spend the bulk of their money on essential items such as transportation and food. While zero-rated goods do offer some relief, a 2% hike will still filter into everyday costs putting more pressure on those who are already struggling," he said.
Manyike also highlighted systemic issues such as wasteful expenditure, poor service delivery at municipal level and weak accountability measures that undermine public trust in government’s fiscal management. He suggested that higher taxes could be seen as a stopgap, unless accompanied by more decisive reforms and prudent expenditure management.
Fixing fiscal failures
According to Manyike, “Increasing VAT may bring short-term relief to the public purse, but it doesn’t solve the underlying problems of fruitless expenditure or corruption. We need to see stricter controls, better financial governance at local and national government level and a concerted effort to ensure taxpayer money is spent responsibly. Without that, consumers can feel like they’re being asked to pay more just to finance the same inefficiencies.”
Despite this year's budget including no additional funds to rescue failing municipalities, Manyike highlighted the poor culture of expenditure management at both the local and national level. Manyike added, “I’m deeply concerned by the Auditor-General’s findings that in 2024 we saw R3.4bn in infrastructure grants go unspent, R7.4bn lost to fruitless and wasteful expenditure, and R24.1bn in unauthorised spending.
"Of the 257 local and district municipalities, only 34 achieved clean audits for 2022/23 down from 38 previously, while 110 had unqualified audits and 90 received qualified opinions because they couldn’t accurately account for revenue. Municipalities are also losing critical income through neglected infrastructure, which leads to water and electricity losses. If these systemic issues aren’t tackled, simply allocating more funds won’t fix the underlying problems. We risk perpetuating poor service delivery and further eroding trust.”
The political drama behind the budget delay has fuelled concerns that the coalition is too fragile to handle major decisions, further complicating South Africa’s path to economic recovery. Analysts point to the symbolic nature of a delayed budget, the first since the dawn of democracy as a sign that deep rifts exist within the coalition. Nevertheless, some argue that the postponement is proof of democracy in action, with partners exercising real negotiation power rather than rubber-stamping proposals from the Treasury.
Market stability concerns
In the immediate aftermath of the delay, the rand slipped by around 1% against the dollar, though it later recovered to previous levels. Investor jitters were evident in the bond markets, with government paper losing ground.
Observers say that any further instability or last-minute fiscal manoeuvring could create longer-term damage to investor confidence, precisely at a time when foreign capital is crucial for financing infrastructure, addressing unemployment and stimulating growth in Africa’s most industrialised economy. One thing is certain, uncertainty is not good for the market and consumers alike.
Beyond the immediate fallout, the question is how policymakers can reconcile the urgent need to stabilise public finances with the necessity of preserving social safeguards. South Africa has some of the highest inequality levels in the world and broad sections of the population are vulnerable to even marginal changes in consumer prices. The Treasury is reportedly exploring offsets such as inflation-beating increases in social grants, additional zero-rated basic food items and adjustments to the lower tax brackets, all intended to shield the poorest households from a heavier burden.
The final outcome, whether a VAT hike, higher personal income taxes, or deeper cuts in public expenditure remains to be seen. With the new budget date set for 12 March, the negotiations in Parliament over the coming weeks will determine just how bold or cautious the eventual fiscal package will be. Until then, businesses, investors and ordinary citizens alike are left in limbo, bracing for the economic aftershocks of South Africa’s most politically fraught budget process in decades.
