South African Finance Minister Mr Enoch Godongwana had planned to announce a 2% increase in Value Added Tax (VAT) during this year’s Budget speech set down to be presented in Parliament on 19 February but enormous pressure from almost all political parties, including the DA and the EFF, saw him reduce that to an interim 0.5% VAT hike. However, due to lack of consensus within the Cabinet, tabling of the first Budget under the Government of National Unity (GNU) was postponed to 12 March when the Minister announced a 0,5% increase in VAT with a possible extra 0,5% in 2026.

The impasse over the proposed VAT increase continues with political parties in hectic negotiations to find a Budget compromise as concerns grow about the future of the GNU.

Three decades have passed since the first democratic elections in South Africa yet the country still struggles with the triple challenge of unemployment, inequality and poverty.

All in all, South Africa’s current weak economic growth and outlook present a very bleak picture for all its people.

Infrastructure Investment

South Africa is under pressure in the areas of infrastructure investments and job creation. In his Budget speech, Minister Godongwana argued that tax hikes would contribute immensely to the planned R232.6 billion funding of key programmes. He said: ‘Funding is needed for spending on infrastructure investments, social protection, a higher-than-anticipated public-service wage agreement, and provisional allocations for critical frontline services.’

The current strategic focus of the National Treasury is on electricity, rail, water and transportation infrastructure projects. Such investments are projected to contribute immensely to the reduction of the cost of doing business in the country which should also have a positive impact on employment and the gross domestic product.

Infrastructure investment has been featured in several previous State of the Nation Addresses (SONA) and Budget speeches. However, the actual amount spent by the government on infrastructure does not reflect the radical nature of the investment. As a percentage of total government expenditure, capital expenditure has declined significantly from 11.7% in the 2013/14 financial year to 7.4% in the 2023/24 financial year. Even in the medium-term outlook, capital expenditure is not projected to reach 9% of total government expenditure. The National Treasury has confirmed that ‘infrastructure investment declined as a share of total expenditure, indicating a shift towards current consumption at the expense of future growth.’

As such, desirable sustainable growth that will be able to alleviate the pressures of unemployment can be achieved if the government is radical with infrastructure investments. The majority of employment should come from the private sector rather than government. As such, government should also focus on creating a fertile environment for private investments and entrepreneurship.

With the decline in infrastructure expenditure, the situation is made worse by incomplete projects, inefficiencies and fruitless expenditure. Included in the current government expenditure is the need to finance the growth in the size of the government, for the maintenance of the GNU. The postponement of the Budget presentation contributed to continuous fruitless spending by the government. It may also be considered as part of the cost of having the GNU.

In order to finance its planned increase in expenditure, the government projected that it would raise an additional R58 billion if the increase in VAT from 15% to 17% went ahead. The revised proposal of 0.5% increase, due to be implemented from 1 May this year, is expected to add R28 billion to government coffers.

Economic harm from tax hikes outweighs economic benefits from developing countries. Tax hikes are not guaranteed to raise revenue as projected. Learning from the last VAT hike (from 14% to 15% in 2018), revenue collected was way lower than expected. A VAT hike discourages the very same local consumption expenditure (the single most important component of the gross domestic product) from which government is hoping to raise revenue. This might also negatively affect businesses and further reduce unemployment levels. Nevertheless, more tax hikes are expected – Minister Godongwana says a further 0.5% increase in VAT will be implemented from the 1 April, 2026. Treasury did not raise company income tax or personal income tax, but decided not to adjust tax brackets and medical tax credits for inflation as usual. The non-adjustment of tax brackets to take care of inflation reduce the effective power of salaries and wages.

Zero-Rated Essential Food Items

It should be noted that, as at 27 February 2025, the government has already received additional tax revenue of more than R11.6 billion from the two-pot retirement reforms implemented from 1 September, 2024. Further tax revenue is expected as people continue to put in their claims. Raising VAT has a significant impact, especially on the poor, because they have little to no room to readjust their expenditure. To mitigate the impact of the VAT increase, the government proposes to extend the current list of 21 zero-rated essential food items. ‘From 1 May 2025, zero rating will be extended to include edible offal of sheep, poultry, goats, swine and bovine animals; specific cuts such as heads, feet, bones and tongues; dairy liquid blend; and tinned or canned vegetables, (National Treasury, 2025). Treasury says zero rating is a ‘blunt tool to assist lower-income households, because there is no guarantee that there will be a reduction in prices.’ Nevertheless, authorities are convinced that the proposed items are consumed mainly by the lowest income earners and poorest people in South Africa and the increase in the number of zero-rated items will lead to lost revenue of about R2 billion. 

A macroeconomic policy that seeks to raise taxes and keep a budget surplus is a contractionary fiscal policy and it is clear that the government has adopted this for the current budget which is not ideal for a developmental state. It sacrifices economic growth for a reduction in government debt.

What is evident from the 2025/26 Budget is that South Africa is struggling to create an environment that incentivises private investment while there is an over-reliance on government for the majority of the country’s investments.

Allowing increased private sector participation would undoubtedly ease the burden on the fiscus.

Dr Sanele Gumede is a senior lecturer in Economics at UKZN; academic leader: High Impact Community Engagement at the School of Accounting, Economics and Finance at the University, and a founding member of UKZN’s Macroeconomics Research Unit.

*The views and opinions expressed in this article are those of the author and do& not necessarily reflect the official policy or position of the University of KwaZulu-Natal.

Words: Dr Sanele Gumede

Photograph: Supplied