The National Treasury took the politically explosive decision to increase the rate of VAT by two percentage points to 17% from April 1, which was rejected by the members of the government of national unity (GNU).
Finance minister Enoch Godongwana conceded in a media briefing ahead of the his postponed budget speech in the National Assembly the move carried a political risk — political parties would not want to lose support — and this would have to be managed.
An extended cabinet meeting delayed Godongwana's speech and then speaker in the National Assembly Thoko Didiza announced that the budget speech would be postponed.
Godongwana said raising VAT was the best option in the face of very high debt to GDP and the erosion of front-line services particularly in education and health which could not be cut further.
The minister warned the outcome could be different from what was tabled in the budget. “It's not going to be business as usual where we were assured that what we tabled will be the final outcome.” He noted that the cabinet had not signed off on the budget.
The head of Treasury’s budget office, Edgar Sishi, also said in an interview the Treasury did not want to increase borrowing to fund operational expenses.
“A tax rate increase has become unavoidable to ensure adequate funding for policy priorities while maintaining fiscal sustainability,” the draft Budget Review tabled in parliament Wednesday said.
“Increasing taxes on consumption through a higher VAT rate will have the least detrimental effect on economic growth and employment over the medium term relative to increases in personal or corporate income taxes,” it said.
Reserve Bank governor Lesetja Kganyago added in the same briefing a VAT increase would be a shock to the bank’s inflation forecast but the bank would only respond if the shock triggered a further, second round of price increases which would kick in much later.
In terms of the Treasury’s draft budget measures were proposed to offset the affects of the VAT increase on the poor. Above inflation increases of 6.9% were proposed for most social grants, additional food items would be zero-rated and there would be no increase in the fuel levy. There would also be tax relief for the two lowest personal income brackets.
The budget proposed R58bn in additional tax measures which Treasury said would enable additional funding for service delivery such as on early childhood development, hiring more teachers and doctors and other front-line personnel and rebuilding the commuter rail system.
The draft budget also provided for the extension of the Covid-19 social relief of distress grant (SRD) for another year and the higher than expected public service wage increase.
In terms of the proposals, the R58bn additional tax would have been made up of a R1.5bn gain from the full inflationary adjustment for only the lowest two personal income tax brackets and all rebates, R1.5bn from no inflationary adjustments to medical tax credits and R60bn from the VAT rate increase.
Additional costs would accrue from the R2bn additional zero rating of foodstuffs and the R4bn cost of no adjustment to the fuel levy. The remaining income brackets would be partially adjusted for inflation. No changes to medical tax credits were proposed. Increases in the excise duties on alcoholic beverages and tobacco related products — 6.83% and 4.83%, respectively — were also proposed.
The Treasury proposed to cancel the inflationary increase in the health promotion levy (sugar tax). The proposed tax measures would have also enabled the Treasury to maintain its course of fiscal consolidation and reducing the level of government debt relative to GDP over the next three years. The gross debt to GDP was forecast to narrow from 76.1% in 2025/26 — higher than the 75.5% forecast in the medium term budget policy statement (MTBPS) of October — to 75.7% in 2026/27 and 74.8% in 2027/28. Debt was forecast to stabilise in 2025/26.
“The fiscal strategy remains on track,” the Budget Review said. The consolidated budget deficit was forecast to be slightly higher than the MTBPS forecast at 4.4% in 2025/26 (4.3%), declining to 3.8% in 2026/27 (3,6%) and 3.4% in 2027/28 (3.2%). A net drawdown of R9.9bn from the contingency reserve was provided for. A primary budget surplus (when revenue is higher than noninterest expenditure) of 0.5% of GDP was expected for 2024/25 rising to 1.1% in 2025/26 which would have enabled government to stabilise debt by the end of the next financial year.
The draft budget did not provide any relief to Transnet as hoped by economists but did allocate R19.2bn to the Passenger Rail Agency of SA (Prasa) over the next three years particularly for its signalling systems.
Godongwana said government would give other forms of infrastructure support to Transnet and did not rule out the possibility of guarantees on its maturing debt.
The Treasury reduced its 2024 economic growth forecast from 1.1% in the MTBPS to 0.8% due to weaker agricultural and transport performance in the third quarter with growth forecast of 1.9% (1,7% in MTBPS) in 2025, 1.7% in 2026 and 1.9% in 2027. It flagged downside global risks arising from trade disputes and geopolitical tensions among other factors.
Inflation was forecast at 4.5% for 2025. Gross tax revenue for 2024/25 was expected to be R19.3bn below the expectation in the 2024 budget but slightly better than the downwardly revised projection in October. Gross tax revenue for 2025/26 after the tax proposals was projected at R2-trillion and was expected to increase by 10.2% in 2025/26, 7,1% in 2026/27 and 6.6% in 2027/28. A total additional amount of R23.3bn was allocated to social grants over the next three years.
The National Treasury proposed to continue the Covid-19 social relief of distress grant for another year at a cost of R35.2bn but no increase has been made to the R370 amount allocated to beneficiaries and no continuation was pencilled in for the grant in the outer years. The Treasury said it anticipated finalising its consolidation of labour activation programmes this year.
Sishi said no new spending cuts were made in the budget which provided for consolidated government spending to increase at an annual average of 5.8%. Consolidated government spending was projected to increase from R2.4-trillion in 2024/25 to R2.84-trillion in 2027/28. Spending pressures of R252.6bn were accommodated which after various drawdowns results in a net increase in non-interest expenditure of R173.3bn over the next three years.
Additional funding of R46.7bn was made available for infrastructure investments while R23.4bn was made available for the 5.5% increase in public service wages over the next three years. The budgets for basic education, health and police are projected to grow by 5.9%, 5.9% and 5.2%, respectively.
Economic development was the fastest growing function growing at an annual average rate of 8.1%. An amount of R5bn was allocated for the deployment of the SA National Defence Force in the Democratic Republic of Congo and R29bn for provincial education compensation costs.
The SA Revenue Service was to receive an additional R3.5bn and home affairs R8bn for its digitisation and human resource projects.
The Budget Review noted that debt service costs consumed 22c out of every rand of revenue and were growing faster than GDP. Debt service costs would amount to R424.2bn in 2025/26. The public sector borrowing requirement would be R450.6bn in 2025/26, R334.4bn in 2026/27 and R360.6bn in 2027/28.
The tax to GDP ratio is expected to average 25.5% over the next three years.
In terms of the draft budget the social wage accounted for 61% of noninterest spending over the next three years. The Treasury planned to release a discussion document with the Budget Review on proposals for a fiscal anchor but continued to use the primary budget surplus to stabilise debt as the anchor.
Update: February 19 2025
This story has been updated with commentary.
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