Tax collection efficiency has become a defining priority in the 2025/26 fiscal year. With tax season now under way, scrutiny has intensified, particularly following the allocation of additional funds to the South African Revenue Service (Sars) in the latest national budget.
With attention turning to revenue performance, structural factors that determine Sars’s revenue outcomes have also come under the spotlight. The size and trajectory of economic growth remain vital, particularly given the pivotal role of personal income tax, which is closely tied to employment and earnings.
The relationship between work and wellbeing is undeniable. In South Africa, employment isn’t just an economic indicator, it is also deeply tied to survival. With unemployment close to 33%, millions of people navigate life through two crucial safety nets: government grants and participation in the informal sector.
The historical data from Stats SA's Quarterly Labour Force Survey (QLFS), which measures both formal and informal employment, reveals several noteworthy trends. Foremost is its record of lower employment levels in the informal sector compared to the formal economy.
In Q1 2025, approximately 3-million South Africans were engaged in informal work, or about 5-million when we include agricultural and domestic labour in private households. This accounts for almost a third of the country’s 16.7-million employed citizens.
More recently, concerns have been raised about whether this number understates the actual scale of the informal sector. It’s entirely possible that the true size of the informal economy extends well beyond what official surveys capture. One reason is that individuals involved in unregistered or illicit activity may understandably avoid participation, leaving behind a large and economically active segment that slips through the cracks.
Another notable observation in the QLFS is the inverse relationship between formal and informal employment over time. Analysis of data from 2008 onward shows that as formal employment grows, informal sector jobs often decline or slow. But when formal employment levels stall or shrink, the informal sector tends to expand.
South Africa is often described as having a dual economy, one formal and one informal, with the two spheres seen to operate largely independently. Yet official statistics suggest a more interconnected reality.
When the formal economy struggles to create jobs, many individuals pivot to the informal sector as a survival strategy. This “fallback” dynamic underscores the resilience of South Africans, but we should not overstate what the informal economy can achieve on its own.
While it plays a vital role in absorbing those excluded from formal employment, for most people a stable, decent job remains the preferred and most secure path to economic participation.
Formalising businesses not only empowers owners but purifies the economic waters by providing an important distinction between legitimate enterprises and illicit operations
However, a different picture emerges when we consider the entrepreneurial spirit that thrives within the informal and township economy beyond micro-trading. In the township economy, we see the rise in sectors such as residential real estate, financial services, beauty and grooming, vehicle maintenance and small-scale manufacturing, illustrating the diverse and enterprising nature of this space.
Sadly, while these businesses are real, strategic and deserving of visibility, they remain fragile. When informal entrepreneurs identify a market gap, formal businesses often rush in with scale, powered by improved access to capital, among other advantages.
A more integrated and symbiotic relationship between the informal and formal economies is essential. Within the informal sector lies a wealth of legitimate, strategically positioned, and high-potential enterprises that contribute meaningfully to economic activity.
When left unaccounted for, this space is not only underestimated, but it also leads to an incomplete picture of the true size of the economy and its actual tax base. In turn, this can distort social and fiscal metrics, such as the number of grant beneficiaries relative to economic participation.
With access to capital and supportive systems, many informal ventures have the potential to evolve into sustainable, job-creating small, medium and micro enterprises.
The financial services sector plays a pivotal role in this transition. One of the simplest but most effective steps is enabling informal businesses to open and use formal bank accounts, creating a foundation for greater visibility, financial inclusion and growth.
Formalising businesses not only empowers owners but purifies the economic waters by providing an important distinction between legitimate enterprises and illicit operations. By advocating for the recognition and support of lawful informal businesses, we move towards a more complete view of a single, inclusive economy, better captured in national statistics and more effectively planned for public policy.
• Makhoba is an economist and lead specialist of research and analytics at Liberty, the insurance and asset management arm of Standard Bank
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.