Budget Speech: Vat delay disrupted plans, but increase remains likely
At the centre of the disagreement was the proposal to increase Value-Added Tax (Vat) by 2% to 17%, or described another way, Vat in 2025 could be 13.3% higher than in 2024. The last time the government raised Vat in South Africa was in 2018 by 1% from 14% to the current rate of 15%.
Given the controversy surrounding the proposed VAT rate increase, its inclusion in the re-tabled Budget may come as a surprise. However, if the state needs to generate revenue, VAT is a highly effective tool to achieve that.
That said, how the additional funds are allocated and utilised is crucial. If the revenue from a Vat increase is used effectively to foster economic growth, its drawbacks can be mitigated through improved infrastructure investment, job creation, and a more supportive economic environment.
While the political dynamics will only come to light after the re-tabled Budget speech, and with the government needing to raise an additional R60bn to meet its expenditure goals for the coming year, a Vat increase of some nature still remains likely.
The only factor that may prevent a Vat increase from becoming a reality is the government deciding to cut expenditure. This decision requires significant political capital, given the vested interests that may be adversely affected by budget cuts. Given these costs, increasing Vat is likely the most palpable economic and political choice.
Vat may be a double-edged sword
Raising Vat may, from a government perspective, represent a zero-sum game, with it reportedly framed as “the best of the worst options”, but increasing Vat again in any shape or form may create unintended consequences.
These include the Vat increase not realising the desired revenue, increasing inflation which may see the Reserve Bank hold interest rates at higher levels for longer, and cause taxpayers to change behaviour.
This behaviour change may lead to South Africa’s small and under-pressure tax base reducing spending, harming economic activity and placing businesses under cash flow pressure. As recent history illustrates, if the business sector faces cash-flow challenges, one area leveraged to reduce costs is headcount.
The government has previously stated that increased Vat will support more health, education, and social-grant spending, a laudable goal. However, it is not inconceivable that increasing Vat may result in a hollow victory, with the state finding itself in a similar situation 12 or 24 months from now.
Zero-rating and government positioning to signal future policy direction
To soften the impact of a VAT increase on the poor, the government has reportedly proposed expanding the list of items that are zero-rated for Vat.
The findings of several tax commissions have suggested that zero-rated items are not an adequate way to reduce the impact of a higher Vat rate. Low-income earners only benefit from a small proportion of tax revenue forfeited on zero-rated items, and low-income earners also purchase standard zero-rated items, exposing them to a higher Vat rate.
The most long-lasting effect of the re-tabled Budget may be how it sets the tone for future state spending. While it is unlikely that the current administration will cut spending and implement policies that harm influential constituencies, influential persons across the political and business spectrum are increasingly advocating for reduced expenditure.
These ideas may not hold sway at present, but the political gravity at a national government level is likely to evolve further in the coming years. Coalition governments will likely rule South Africa for the foreseeable future, meaning that the diversity of views within government is only likely to widen.
As a consequence, voices supporting state reform and reduced spending will always have a seat at the table in some form and possibly represent a majority in the future.
As we await the Budget speech, there is an opportunity for government to set a course for sustainable growth and economic resilience. A well-balanced approach—combining revenue generation with prudent spending—could pave the way for a more stable fiscal future. The decisions made now will not only shape the immediate economic landscape but also lay the foundation for long-term prosperity.