Increase in VAT will over-burden struggling households: Economists

Some economists say the increase in Value Added Tax (VAT) will over-burden already struggling households.

Finance Minister Enoch Godongwana announced a 1 percentage point VAT hike over two years with the first increase of half a percentage point expected in May.

Another increase will be implemented in April next year.

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Independent Economist Ntombi Mbele-Thomo says, “National Treasury should have looked at other avenues to raise funds rather than going directly to South African pockets.”

Meanwhile, KPMG’s lead economist Frank Blackmore points out that VAT increases are typically permanent, despite assurances that they may be reduced once the budget stabilises.

“We’ve only had increases since the introduction of VAT in South Africa and probably the same is true for any other country. A similar thing would be the case, perhaps for corporate income taxes and personal income taxes, although I don’t think those would increase at this point in time.”

The disadvantage, he says is that the increase would affect not just the current budget but all future ones, reduce household disposable income, impacting the poor and potentially cause political repercussions.

While cautioning against it, Currency Strategist at Treasury One, Andre Cilliers acknowledges that a VAT increase would provide government with an urgent revenue boost.

He says borrowing to fill the fiscal gap could spell disaster for government.

“It will definitely not be very pleasing for number 1 ratings agencies and that could mean a change in our rating. If you look at our expenses on the expenditure side of the budget. Of the government’s expenses, then, the debt that we have to service currently is our biggest expense. So, we cannot increase that. We must remember that out of every one rand that the government currently gets in around 23 to 24 cents of that is already being spent on debt servicing costs. Just pure interest.” – Additional Reporting by Nosipho Radebe and Nothandu Magudulela

Budget Speech 2025 | Economists reactions to budget