Wealth taxes — including those targeting high-net-worth individuals, along with levies on luxury assets, inheritances and large estates — and corporate tax reform are some of the alternatives the Institute for Economic Justice (IEJ) has suggested to replace a VAT hike in the 2025 budget.
Finance minister Enoch Godongwana’s much-anticipated budget speech, initially scheduled for last Wednesday, was postponed to March 12 after an extended cabinet meeting.
At the centre of the budget’s rejection was the controversial, now-shelved proposal to raise VAT by two percentage points — a move criticised for its potentially regressive impact on the country’s poorest households.
The IEJ raised both the proposed VAT hike and the broader fiscal approach: “The two percentage point VAT increase is not the only misguided decision. So too is the continued path of underinvestment. Equally problematic is the DA’s extremist position of ‘no tax increases’. The inevitable consequences of this position would be draconian expenditure cuts that would harm the poorest,” it said in a lengthy statement.
“Similarly, the budget postponement should not be used as an opportunity to fast-track the implementation of the fiscal anchor, which the DA has ironically supported without considering its long-term implications on the resourcing of public services and the rigidity it will impose on fiscal policy,” the IEJ added.
The IEJ, a progressive economic policy think-tank based in Joburg, was established by SA academics, activists and former government policymakers. Its mission is to advance economic justice, systemic change and the equitable distribution of resources to ensure realisation of rights and overall wellbeing.
In its latest analysis of the scrapped budget documents, the IEJ reveals an emphasis on debt stabilisation at the expense of much-needed investments in public services.
Despite the Treasury’s focus on achieving a 0.5% primary budget surplus in 2025, the IEJ highlighted the country’s stark socioeconomic realities.
“Recently, Stats SA reminded us that 12.3-million people remain unemployed. We know that as of 2015, more than 18-million people lived below the food poverty line, with the National Treasury acknowledging that this number has likely increased due to the fall in GDP per capita in the decade since 2015.”
The two percentage point VAT increase is not the only misguided decision. So too is the continued path of underinvestment.
— Institute for Economic Justice
The think-tank described the scrapped budget as “a worst-of-both-worlds middle-ground compromise that fails to chart a viable path.”
There is scope to increase real spending on public services, the IEJ noted, yet spending on critical social services remains “woefully inadequate.”
In healthcare, budget constraints have worsened the health department’s ability to hire more doctors — this as more than 1,800 remain unemployed — despite a growing demand for their services, the IEJ said.
In basic education, the government planned to spend an inflation-adjusted R19,482 per learner in 2027/28, only marginally higher than R19,250 in 2025/26.
Rather than viewing public spending as a cost, the government should increase and better allocate investment in public services, treating it as a long-term investment, the think-tank argued.
Regarding the Social Relief of Distress (SRD) grant, the IEJ welcomed the above-inflation increases to all social grants in the scrapped budget. However, it warned: “In the context of a proposed two percentage point VAT increase, this is unlikely to result in a meaningful increase in beneficiaries’ disposable income.”
On job creation, the IEJ expressed disappointment that public employment programmes received only R21.5-billion — a decrease from R22.2bn in the previous fiscal year — despite the country’s persistently high unemployment.
“It is disappointing that not only have public employment programmes received a measly allocation amid high unemployment, but this amount is even lower than the allocation in the previous fiscal year,” the IEJ stated.
Regarding infrastructure investment, the IEJ notes this is crucial for boosting economic growth, yet it highlighted SA’s combined public and private capital investment stood at just 15% of GDP in 2023 — well below the National Development Plan’s 30% target by 2030.
Despite evidence showing investing just 1% of GDP in infrastructure could yield significant economic gains, the IEJ noted the budget’s reliance on private sector mechanisms like credit guarantees risks failing to deliver the needed investment levels.
“Evidence shows that an annual investment of just 1% of the GDP in infrastructure could increase GDP by 1.3% immediately and by 2.4% for the five years that follow.
“Given these potential gains, it is important for the upcoming budget to massively scale public investment in rail, telecommunications and other infrastructure,” the IEJ says, adding that an allocation of only R400bn to provinces and local governments over the medium term will not sufficiently contribute to reducing infrastructure backlogs, nor “crowd in” private sector investment in the long run.
As the postponement of the budget presents an opportunity for the Treasury to reconsider its fiscal approach, the IEJ maintained revenue generation should be achieved through progressive taxation and strategic public investments rather than austerity measures that risk worsening inequality and economic stagnation.
It has therefore tabled several alternative revenue-raising measures that it argues would be less harmful than a VAT hike:
1. Improve Sars’ capacity: Strengthening Sars’ ability to collect existing taxes is the most effective and least painful option.
2. Use reserve funds: The National Treasury could draw further funds from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), which holds over R300bn, to finance key priorities without raising taxes, while maintaining a prudent buffer.
3. Cut unnecessary tax breaks: Eliminating inefficient tax breaks — such as medical aid rebates (costing R39bn), high-income pension contribution incentives (R82.6bn), and corporate tax incentives (over R15bn) — could raise significant revenue, surpassing the gains from a VAT increase.
4. A different VAT system: Instead of raising VAT for everyone, applying a higher VAT rate to luxury goods could generate substantial revenue, with a 25% rate estimated to raise R9bn annually.
5. Increase taxes on corporations and high earners: Reversing the corporate income tax rate from 27% back to 28% could recover R15bn annually, while adjusting personal income tax brackets and implementing a social security tax could raise an additional R64bn.
6. Implement wealth taxes: Introducing a net wealth tax could generate between R70bn and R160bn annually, while a small financial transactions tax (0.1%) could yield over R40bn.
7. Prioritise effective tax collection over new taxes: Improving compliance among large corporations and high-net-worth individuals could recover significant lost revenue without imposing new taxes on the broader population.
8. Address tax evasion by multinationals: Tackling base erosion and profit shifting (BEPS) could close revenue gaps exploited by international businesses.
9. Consider resource-based taxes: A resource rent tax targeting profits from natural resources could raise R38bn annually.
10. Prioritise progressive measures over VAT increases: All proposed measures are preferable to a blanket VAT hike, ensuring revenue is raised without disproportionately affecting poor and working-class communities.
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