Finance Minister Enoch Godongwana’s failed bid to increase the value-added tax (VAT) by two percentage points to 17% from 15% will hit social grant recipients the hardest.
Godongwana has opted to raise the VAT by “significant” one percentage point over the next two government financial years, which will bring the VAT to 16%.
This will see a total revenue collection increase of R42.5-billion over the next two years.
In the failed 2025 Budget Speech in February, Godongwana had planned to increase the child support grant to R580.
However, on Wednesday, he revised the grant increase downwards to R560.
The old age, disability, and care dependency grants have also been revised downward to R2 335 from R2 315.
However, war veterans and construction will be big beneficiaries of the 2025 Budget Speech.
The war veterans grant has not been revised downward when compared to the failed February Budget Speech, remaining the same at R2 335.
The same applies to the government’s infrastructure budget, which has remained the same at R1.03-trillion.
Increase in revenue
The infrastructure budget has recently been criticised by economists as ineffective in growing the economy over the past few years.
“In response to new and persistent spending pressures, the 2025 Budget proposes a significant increase in revenue.
“Most importantly, the government has taken the difficult decision to raise the VAT rate by 0.5 percentage points in each of the next two years, bringing VAT to 16% in 2026/2027,” said Godongwana.
He stated that the proposed tax revenue increases were meant to fund new and persistent spending pressures.
“These measures are expected to raise R28-billion in additional tax revenue in 2025/26 and R14.5-billion in 2026/27, mainly by not adjusting personal income tax brackets for inflation and increasing the VAT rate by 0.5 percentage points in each of the next two years,” said Godongwana.
In an unprecedented move, the 17% VAT hike that was proposed in the failed February 19 2025 Budget Speech resulted in the speech being postponed to March 12.
The speech was called off after the DA, which is the second largest party in the coalition government with the ANC and other parties in the government of national unity, did not approve of the VAT hike.
Economists and political parties have recently slammed the VAT hike, asserting that it will decrease households disposable income and result in consumers spending less on goods and services, which would eventually lead to negative consequences for small businesses.
Funding for commuter rail
In an attempt to console taxpayers, Godongwana said: “The government acknowledges that this measure will place greater pressure on households.
“However, the impact is cushioned by the spending support outlined above and across the budget, such as above-inflation increases in social grants, the extension of fuel levy relief, and the addition of new food items to the basket of goods that are zero-rated for VAT.”
“This and other revenue increases will provide additional funding for several frontline functions, with investments in education, health, early childhood development, and commuter rail services.”
He said the additional revenue will be used to increase funding for commuter rail.
“The impact of the tax measures on the most vulnerable households will be cushioned by real increases in social grants, an expansion of the list of zero-rated foods, and continued fuel levy relief.
“Over the medium term, new spending pressures will need to be addressed through expenditure reductions, reprioritisations, or additional revenue measures,” he said.
He, however, emphasised that over the next three years, the government’s “new spending pressures must be funded either through additional revenue increases or expenditure reductions or reprioritizations, which may include eliminating non-performing programmes”.
Despite the adjustments on social grants as compared to the failed budget speech, Godongwana asserted that the VAT increase was essential for the extension of these grants.
He said increasing personal income tax would weigh heavier considering that South Africa has a higher income tax collection considering the higher gross domestic product percentage than other developing countries.
Taking additional debt is not feasible
“We thoroughly examined alternatives to raising the VAT rate. We weighed up the policy trade-offs involved, including increases to corporate and personal income taxes.
“Increasing corporate or personal income tax rates would generate less revenue while potentially harming investment, job creation, and economic growth.
“Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs,” said Godongwana.
He emphasised that taking additional debt was not feasible and the level of borrowing would put the country in a downgrade.
“Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades. Madam Speaker, VAT is a tax that affects everyone.
“By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered.
“The increase is also the most effective way to avoid further spending cuts and to enable us to extend the social wage,” said Godongwana.
