Lower-income households will feel the weight of the proposed 2025 budget, Chris Axelson, acting head of tax and financial sector policy at the National Treasury said on Tuesday.
However, he explained that it was a sensitive balancing act — where gains in one area come with losses in another.
Speaking at the PSG Think Big webinar on Tuesday, Axelson outlined how the Treasury decided to increase VAT by 0.5 percentage points each year until it reached 16% in 2026/27.
The VAT increase has shaken parliament and the relationship between the two biggest parties in the government of national unity (GNU), the ANC and the DA.
Axelson acknowledged that political dynamics had complicated the fiscal process.
“The issue is the VAT increase, and it’s a very political issue,” he said.
“Those voices on the other side are getting louder, and we will have to try and get to some agreement, and hopefully this budget can get passed in the next two weeks.
“I worry a little bit that it’s almost too political, and then you might not get to the best outcome, because there might be political games that are played and, as technocrats, we are now trying to get the most efficient way to hopefully run the country, but also to get the best way forward. You have to balance those things,” he said.
He defended the VAT increase as a necessary measure to cover rising public sector costs.
There’s been a realisation that government needs to work with the private sector
— Chris Axelson, acting head of tax and financial sector policy at the National Treasury
While this may seem like a better deal than in February, when the Treasury suggested a two percentage point increase, the latest budget includes a key drawback: personal income tax brackets will remain unchanged. This means inflation will effectively erode disposable income for most taxpayers.
The Treasury’s approach, Axelson said, aimed to minimise the impact on low-income households by preserving VAT exemptions on essential goods and increasing social grants.
“When we look at the research on tax increases and the impacts on the economy, VAT seems to be the least detrimental to growth,” he said.
However, they were “very worried about consumers”, he said.
“So we looked at, for example, how much lower-income households would spend on food, and we said, ‘Let’s see how much additional in rand terms that will cost.’”
To ease the burden on low-income households, the Treasury has expanded the VAT-zero-rated food basket, approved above-inflation social grant increases and kept the fuel levy unchanged for another year, saving consumers R4bn.
But Axelson acknowledged not all food products were zero-rated. “And for that reason, the initial budget [February] had quite a big increase in grants above inflation as a nominal value.”
“It’s a very difficult situation. We didn’t want to increase the fuel levy because there’s no zero-rating on fuel.”
He said transport costs formed a large part of lower-income households’ budgets, “much bigger than in other countries ... so we tried to limit the impact on transport costs as well”.
However, Axelson acknowledged that lower-income households that were just beginning to pay “a little bit of income tax” would feel the strain under this budget, despite these mitigating factors.
“It’s a quid pro quo. I mean, you’re going to give some relief on the one side, then you’ve got to get on the other side. And those are the balancing acts that we try and do all the time in compiling these budgets.”
Those voices on the other side are getting louder, and we will have to try and get to some agreement, and hopefully this budget can get passed in the next two weeks
— Chris Axelson, acting head of tax and financial sector policy at the National Treasury
Axelson emphasised the urgent need to stabilise debt, and reiterated that SA’s debt-to-GDP ratio remained “too high”, adding that “hopefully, these geopolitical issues won’t have too much of an impact”.
“We got to get it [debt] down, because we don’t have much of a buffer,” he said, referring to the contingency reserve, which is intended for unforeseeable or unavoidable risks but dropped from R8bn to R5bn in the budget tabled a week ago.
Axelson also highlighted the importance of leveraging private sector funds to boost investment in public infrastructure.
“There’s been a realisation that government needs to work with the private sector.”
The challenge of balancing expenditure with available revenue was another key theme.
Axelson acknowledged that while cutting wasteful spending was a valid public concern, identifying and eliminating inefficiencies in government programmes was not straightforward.
“The trick is it’s very difficult to get rid of that expenditure tomorrow because you don’t know where it is. There’s no line item that says, ‘This is the inefficient expenditure, let’s cut that.’”
He noted that much of the responsibility lay within the departments rather than with the Treasury.
“The departments and the accounting offices within the departments are the ones who know it.”
He says the Treasury had done a lot of spending reviews. “Now it’s about trying to implement those, and the departments would need to come forward and actually do that.”
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