For the first time, the Minister of Finance has admitted that austerity is self-defeating—something the Alternative Information and Development Centre and many others have been saying for several years. Even the Democratic Alliance (DA) are beginning to recognise that shrinking the state’s budget constrains service delivery.
The Minister of Finance says he is sick of being attacked for austerity, so he has partially capitulated to public pressure and is substituting many drastic budget cuts with tax increases. However, he fails to acknowledge that austerity is not just about cutting expenditure—it also includes regressive tax increases like VAT increases, which disproportionately harm the poor and working class.
While the 2025 Budget includes real increases in healthcare, education, and social protection, these are far from sufficient to reverse decades of underfunding or to fulfil the state’s constitutional obligations. Some areas also face cuts, such as higher education and agriculture.
The government’s admission that austerity does not work is a small victory for social movements that have long fought against these policies. However, the changes tabled in the 2025 Budget fall drastically short of what is needed to address the deepening social and economic crisis that continues to place the unemployed and working class on the frontlines.
The problems of continuing austerity
Now, after four years in office, the Finance Minister has woken up and finally admitted that the government’s fiscal orientation and policies were the wrong medicine. But this delayed realisation does little to undo the harm already inflicted. Apart from its social impact, austerity is also self-defeating at an economic level. It makes the economy smaller, which decreases GDP. If the economy shrinks more than the debt, this makes the debt-to-GDP ratio worse. Yet this is the very metric the neoliberal government wants to stabilise.
On the eve of what was supposed to be the tabling of the 2025 Budget in February, a collective of social movements, trade unions, faith-based organisations, and activists gathered for a People’s Budget Assembly at St George’s Cathedral.
Beyond its immediate harm to women, communities, the public sector, and the broader economy, austerity also creates long-term costs. Reversing it will require significant investment to rebuild the systems that have been systematically eroded.
The Minister claims that there have been no cuts in this budget, but this is not true. The Social Relief of Distress (SRD) grant remains at R370, despite inflation. This means that between this year and last year, recipients of the SRD grant will become at least R17 poorer. In addition, where there have been inflationary increases to line items in the budget, it is insufficient. The Child Support Grant is one such example: the new value of the grant falls 30% below the extreme poverty line. This means that 13 million child recipients will not be able to meet their minimum energy intake per day without another source of income.
Additional funding is provided to Early Childhood Development, but the new subsidy of R24 per child per day simply accounts for the many years of not adjusting it for inflation. It will not be able to cover the full nutritional, staff, and infrastructure costs for ECD facilities. The above inflation increases in Basic Education are predominantly a result of the new ECD allocations, but the nominal increase of R24 billion is far from the R129 billion budget shortfall in the department.
On the eve of what was supposed to be the tabling of the 2025 Budget in February, a collective of social movements, trade unions, faith-based organisations, and activists gathered for a People’s Budget Assembly at St George’s Cathedral. Testimonies from across the country painted a harrowing picture of how austerity continues to devastate people’s lives. Professor Lydia Cairncross, from the People’s Health Movement, put it plainly: “when politicians cut health budgets what they mean is that they are cutting lives”.
A budget for the private sector
Not only is the budget stingy in allocating resources needed to address impoverishment, hunger and unemployment, but it favours the private sector. The government is championing Public-Private Partnerships (PPPs). They are derisking private investment in public goods (guaranteeing their profits), in the hope that this will accelerate infrastructure delivery and effectiveness. PPPs, however, often hide the true cost of debt and ultimately make the service costlier for the user. And they result in a shrinkage of the state’s constitutional responsibilities, transforming rights-holding citizens into clients.
VAT
There are more people experiencing hunger today than there were five years ago. This is the context in which Treasury is claiming that the least worst option for raising revenue is to increase VAT.
Two weeks before the March 2025 Budget Speech, Statistics South Africa released a report showing that almost 20 percent of households in South Africa experience moderate to severe hunger. There are more people experiencing hunger today than there were five years ago. This is the context in which Treasury is claiming that the least worst option for raising revenue is to increase VAT. And there is an added risk that a VAT hike will not bring in even half of the predicted revenue, as was the case in 2019.
A VAT increase will increase the household food basket, especially for working class South Africans who are already heavily indebted and often unable to cover all their immediate needs. Treasury assumes that zero-rating additional VAT items will reduce the regressive nature of the increase. But even they admit that it is unclear whether the zero-rating benefit will be passed onto consumers.
A VAT increase is simply unacceptable in a cost-of-living crisis, especially when there are far better and less painful options available.
Alternatives
Between February and March, civil society presented a number of options as alternatives to the original 2 percentage point VAT hike. However, in the budget documents Treasury has failed to transparently engage with the options available. They simply state that the VAT rate is lower than for OECD countries, and that there is no room to increase Personal Income Tax rates because the rich will find ways to avoid paying more tax.
These are not sufficient justifications. SARS needs to be better capacitated to close loopholes for tax evasion and avoidance. And comparing South Africa’s tax rates to the average for OECD countries is inappropriate, because the country is way above the average for inequality and unemployment!
GEPF: One of the options floated includes pausing contributions to the Government Employees Pension Fund (GEPF). The GEPF is over-funded; it had a R60 billion surplus in 2024 alone. Temporarily pausing contributions for a year could free up R59 billion, without affecting workers’ pensions. In the long term, shifting GEPF investments into government bonds rather than private equity (where they are now) would have two benefits. It would provide more stable returns and also be more beneficial for workers and public services (for more, see the article on Page 28 of this magazine).
Tax brackets: Despite the hysteria around the high tax rate and small tax base in terms of number of income earners, the rich in South Africa have been paying less effective tax since the 1990s. This is because Treasury has been giving them tax breaks by adjusting tax brackets by more than inflation. If they had simply adjusted them in line with inflation, we would have had R198 billion more in 2024 alone.
Tax brackets should normally be adjusted by inflation to correct for “bracket creep” (people getting an increase for inflation fall into a higher tax bracket and so pay more tax). This should be halted for the higher tax brackets, to bring the effective tax rate back to the levels of the 90s. In the budget, Treasury has not adjusted the tax brackets at all for all taxpayers. This means that working class families, who are already struggling, will be the worst affected by this tax change.
Wealth tax: For many years, progressives have been calling for the implementation of a wealth tax. A 1-3% wealth tax on the top one percent could generate R59 billion—that’s more than the VAT increase generates. A wealth tax in South Africa is not only a fiscal imperative; it is also a moral one. A wealth tax would fairly redistribute resources and help tackle hunger and inequality. In 2021, SARS started collecting data on wealth ownership with the intention of investigating the feasibility of implementing a wealth tax, but today there is still no movement on its implementation.
SARS: Then there is the need to strengthen SARS. South Africa loses between R28 billion and R100 billion annually when corporations shift profits offshore to avoid taxes (illicit financial flows). If SARS recovered that, it could be spent on public services.
Other financing options include reversing the Corporate Income Tax decrease and removing medical aid tax rebates.
In short, there are many ways to raise funds without making life harder for the poor and working class. Instead of increasing VAT, the government should tax the rich more and the poor less. It should crack down on corporate tax dodging. And it should make use of its assets, like the GEPF and the Gold and Foreign Exchange Contingency Reserve Account, to stimulate the economy to grow.
We must reject austerity in all its forms, especially when there are so many ways to raise the revenue needed.
Aliya Chikte is a Programme Officer in AIDC’s Economic Justice unit.
