The decision by the National Treasury to hike VAT by 0.5 percentage points in each of the next two years could have been partly influenced by the upcoming local government elections and the potential impact that the hikes may have on voting patterns.
The proposed VAT hike was a compromise from the initial offering of two percentage points, offset by extending the basket of VAT-exempt basic goods, but it was still widely rejected by the ANC’s largest coalition partner and opposition parties.
Though finance minister Enoch Godongwana tabled the budget, it is undergoing a parliamentary process which could result in its amendment before being passed. If parliament rejects the budget, which forecasts growth at 1.9% for 2025, 1.7% for 2026 and 1.9% for 2027, it would be back to the drawing board for the Treasury, which has already revised the February budget to accommodate the political disagreements.
The budget tabled by Godongwana on March 12 highlighted the deep political character of the budget process as the 10-member coalition government disagreed over how to stabilise SA’s finances and grow the economy while still prioritising their respective constituencies.
“Governments usually make the difficult decisions within their first year ... you can’t do anything within an election year because everything will be politicised,” a senior Treasury official told Business Day.
Instead of the R60.5bn in revenue expected from the proposed two percentage point increase in VAT, the marginal increase will now raise only R28bn in additional revenue in 2025/26 and R14.5bn in 2026/27. The marginal increase in VAT will affect social grant spending, which will be increased by more than the expected inflation rate but less than was envisaged in February.
We have said in the speech the second 0.5% assumes everything remains the same. Any changes in our revenue structure, we may drop that 0.5% in the next financial year.
— Finance minister Enoch Godongwana
“If parliament decides to remove the VAT hike then we will have to look at increasing the fuel levy but that will impact the travel costs of poor people,” another Treasury official said.
Increasing corporate tax from the 27% was also off the table, the official said, because “companies are already constrained by the electricity hikes and the logistics crisis”.
An initial 0.5 percentage point hike in VAT is set to be implemented in May, followed by another 0.5 percentage point increase in 2026. This coincides with the municipal elections next year, during which the ANC will seek to recast itself to voters as the correct steward of the country’s finances.
The proposed VAT hike is likely to have implications for the elections. It is expected to increase the financial burden on already struggling South Africans, which could lead to widespread discontent and negatively affect the ANC’s chances of clawing back from its successive electoral losses.
The hike may also be seen as a regressive tax that disproportionately affects the poor and vulnerable, possibly further eroding support for the ANC.
Godongwana, who has been a member of the ANC’s national executive committee for nearly three decades and a long-standing leader of the economic transformation committee, signalled last week in a post-budget briefing that the decision to hike VAT to plug the budget expenditure hole was his idea.
“I plead guilty. I woke up one day and said, ‘everybody has been attacking me for austerity. I am sick and tired of it. This time I am going to raise tax’,” he said at an event hosted by News24.
During a meeting on Friday of four parliamentary committees — the two appropriation committees and two finance committees of the National Assembly and the National Council of Provinces — Godongwana once again defended the decision considering the state of the country’s finances.
“We have said in the speech the second 0.5% assumes everything remains the same. Any changes in our revenue structure, we may drop that 0.5% in the next financial year. It’s quite important that that message again is corrected,” he said.
When questioned on the potential effect that the VAT hike would have on the ANC’s electoral prospects, secretary-general Fikile Mbalula said: “Our prospects will increase if the economy performs and people work and you must also look at things broadly speaking, the cost of electricity in SA.”
Mbalula, who is expected to run to replace Cyril Ramaphosa as the ANC’s president in 2027, said the party opted not to support an increase in corporate tax to ensure that companies do not terminate their operations.
“If you were to talk about corporate tax, those big companies that employ millions of our people, how are they are going to be affected which already by now, as it has been explained by Treasury, the tax imposition on them is already high,” Mbalula said during a post-budget media briefing on Thursday.
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