The Treasury has compromised on its proposed two percentage point VAT increase by opting for a half a percentage point hike in each of the next two years.
The DA and other opposition parties have been adamant that they will not accept any VAT increase at all. This was the reason for their rejection of the February 19 budget for 2025/26, which proposed the two percentage point hike. Cosatu and civil society organisations also rejected that budget.
Finance minister Enoch Godongwana said at a media briefing on Wednesday before his budget speech in the National Assembly that he had successfully tabled the budget and it was now up to political parties to engage on it during the parliamentary process.
“I suspect the outcome will be the product of negotiations,” he said, noting that the DA had accepted the half percentage point VAT increase if other matters outside the budget were addressed. President Cyril Ramaphosa held 11th hour meetings with party leaders in the government of national unity (GNU) this week in a bid to reach consensus on the Treasury’s new budget proposals.
Godongwana appeared before the media after a four-hour cabinet meeting, which he described as “tough”.
This year’s proposed VAT increase will take effect on May 1 and next year’s on April 1. The proposed increases will generate R13.5bn in tax revenue in 2025/26, R30bn in 2026/27 and R32bn in 2027/28, the Budget Review tabled in parliament on Wednesday said.
To compensate for the reduced revenue, the additional spending on social grants envisaged in the rejected February budget has been significantly reduced. Also, there will be no tax relief for income earners, whereas the draft February budget did provide for some tax relief to lower brackets of the income tax table at an estimated cost to the fiscus of R4.8bn over three years.
According to the Budget Review, there will be no inflationary adjustment to tax brackets (so-called fiscal drag, which happens when inflation-related wage increases push taxpayers into a higher tax bracket) and rebates in 2025/26. This will generate revenue of R18bn this year and a revenue flow-through of R19bn in 2026/27 and R20.3bn in 2027/28.)
Treasury acting deputy director-general for tax policy Chris Axelson said in a question-and-answer session with Business Day reporters that full provision for fiscal drag was pencilled in for the outer two years of the fiscal framework. No inflationary increase in medical tax credits is envisaged, which will provide R1.5bn in 2025/26 and about R1.6bn in each of the two outer years.
There will also be no increase in the general fuel levy at a cost of about R13bn over three years to limit the impact on the cost of living. Above-inflation increases have been proposed on excise duties on alcohol (6.75%) and cigarettes (4.75%). As envisaged in the rejected February budget, the basket of zero-rated food items will be expanded at a cost of about R2bn in each of the three years of the medium term to mitigate the impact of the VAT increase on the poor. Also specified social grants will be increased by more than the expected inflation rate but less than was envisaged in February.
The Treasury resisted calls to increase the corporate income tax, which is now 27%. “Government considered different options to raise the required revenue. However, increases in personal income tax and corporate income tax would have been more negative for employment, savings, investment and growth than a VAT increase,” the Treasury said.
“Corporate income tax is imposed on businesses but ultimately paid by shareholders, workers and consumers. SA already has a high contribution of corporate income tax towards tax revenue and VAT is relatively low compared to our peers.
“SA has a high share of personal income tax as a percent of GDP and a high top tax rate, both of which are much higher than other developing countries. Previous tax rate increases for personal income tax did not raise the expected revenue as taxpayers changed their behaviour to avoid the tax. It is far harder to avoid a VAT increase.”
Whereas the draft February budget provided for R58bn in additional revenue in 2025/26, R60.5bn in 2026/27 and R64bn in 2027/28 (a total of R182.5bn) due to the proposed immediate two percentage point VAT increase and other tax measures, the additional tax proposals in the latest budget will generate R28bn in additional revenue in 2025/26 and R14.5bn in 2026/27.
The net effect of the tax proposals will result in R28bn in additional revenue in 2025/26, R44bn in 2026/27 and R47bn in 2027/28, giving a total of R119bn and a shortfall of R63.5bn relative to the rejected February budget. In all the negotiations on how to frame a new budget the Treasury was adamant that debt and interest costs should not increase dramatically and it has remained steadfast to its fiscal strategy of debt stabilisation.
However, the revised budget does see a change in the consolidated budget deficit from 4.4% for 2025/26 in the draft February budget to 4.6%; it remains at 3.8% in 2026/27 and increases marginally to 3.5% in 2027/28 compared to the previous 3.4% estimate.
The Treasury has forecast a primary budget surplus (when revenue exceeds non-interest government expenditure) of 0.5% of GDP in 2024/25 and 0.9% in 2025/26 when debt is expected to stabilise. The revised budget also sees a slight increase in gross government debt to GDP from 76.1% for 2025/26 in the rejected February budget to 76.2%, from 75.7% to 75.9% for 2026/27 and from 74.8% to 75.1% in 2027/28. Debt service costs increase by R30.5bn relative to the draft February budget.
The tax to GDP ratio climbs from 24.7% in 2024/25 to 25.4% in 2027/28. The Treasury has retained its February growth forecasts at 1.9% for 2025, 1.7% for 2026 and 1.9% for 2027. Non-interest government expenditure over the next three years has been reduced by R31bn to R5.946-trillion compared to the February budget’s R5.977-trillion with spending in 2025/26 reduced to R1.899-trillion from R1.908-trillion, in 2026/27 from R1.993-trillion to R1.982-trillion in 2026/27 and from R2.075-trillion to R2.064-trillion in 2027/28.
Whereas the rejected February budget envisaged a R173bn increase in non-interest expenditure over three years compared to the 2024 budget, this has now been reduced to a R142bn increase mainly funded through tax increases. The contingency reserve has been reduced to R21.6bn over three years from the R33bn provided for in the draft February budget. The provision of R35bn for the Covid-19 social relief of distress (SRD) grant for only 2025/26 remains unchanged, though provisional allocations for the grant of R36.8bn in 2026/27 and R38.4bn in 2027/28 have been made.
Treasury director-general Duncan Pieterse said in the question-and-answer session with Business Day that this meant there was no fiscal risk around the SRD grant if it was extended. The head of Treasury’s budget office Edgar Sishi said the SRD grant would continue while the government decided on a consistent policy of income support, labour activation and job creation.
The amount allocated for above-inflation increases in social grants over the next three years has been decreased substantially from R23bn in February to R8.2bn. Also, the allocations to frontline services have declined by about R5bn over this period. Infrastructure spending remains the same at R46.7bn over three years. The department of home affairs’ project to digitise its services and capacitate its human resources also suffers in the new budget, with its draft February allocation of R8bn over three years being reduced to R3.3bn.
The SA Revenue Service (Sars) will get R7.5bn over three years for its modernisation programme. Significantly, health expenditure remains unchanged from the February budget with no additional funding provided to mitigate the effect of cuts by the US administration for HIV programmes, which are not channelled through the government but directly to organisations.
Education plans also remain unchanged. While there has been a call for funding for Transnet to fix its logistical challenges, Sishi said that while there would be no equity injection, the government would fund Transnet’s strategic infrastructure projects.
The Treasury highlighted global risks to its projections arising from “escalating protectionist measures, geopolitical tensions and trade disruptions” that could spike commodity prices and reignite inflation. “A stronger US dollar may cause capital outflows in emerging markets and higher risk premiums.”
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