The 2025 Budget has been subject to robust engagement and criticism by parliament, civil society, and other stakeholders. This was due to the now-reversed proposals to hike VAT by two percentage points initially, and then 0.5 percentage points, over two years.
According to a statement by the National Treasury, the reversal of the VAT hike left a budget hole of R75 billion and necessitated ‘spending adjustments’ to cover the shortfall. ‘Spending adjustments’ in this context refer to budget cuts. This presents a false dilemma. It suggests that the National Treasury only had two options: hike VAT to increase grant allocations and hire additional frontline workers, or cut spending further.
It is true that the government faces some critical challenges, including a high cost of borrowing, a low economic growth trajectory, and the need to raise revenue to support its priorities. But the choices on how to address these are not limited to the two options presented by the National Treasury.
Spending cuts are self-defeating – the Minister himself has admitted this, indicating that spending cuts have not arrested debt levels. The reason is simple. The government measures debt levels according to the debt-to-GDP ratio. What percentage of GDP is total debt? Government spending comprises about 27% of GDP (excluding interest payments). Cutting that spending, when there is already low private sector spending and investment, contributes to lower growth and lower GDP. If debt remains the same, that leads to a higher debt-to-GDP ratio. That’s the opposite of what they want.
On the other hand, the proposal to increase VAT, in a context that is still recovering from successive budget cuts since 2012 and their impact on growth and unemployment, was not only regressive. It also ignored a wide range of alternative proposals to raise revenue.
Increasing VAT is regressive because it reduces disposable income for poor and low-income households. New research shows that the proposed two-percentage-point hike would have increased the effective VAT rate by 2.6 percentage points for the poorest 20% of households. This compares with only 0.5 percentage points for the richest 20% of households. It pushes an additional 75,600 people below the poverty line.
To shield the poor from the VAT hike, the National Treasury proposed additional zero rating. However, previous efforts at zero-rating essentials such as food had mixed success. Deputy Minister of Finance David Masondo himself said that “suppliers did not pass on the benefit of the VAT relief to consumers as was intended.” So, zero-rating of food items does not sufficiently lower prices for poor consumers, and it is likely to still leave poor households exposed to higher prices. Also important to note is that some necessities are not zero-rated, such as electricity and transport, which would still erode disposable income.
The National Treasury has deliberately presented a false dilemma despite evidence of the negative impact of both budget cuts and a VAT hike. The reasons for its unwillingness to consider alternatives are ideological. The Minister claimed that the VAT increase was also necessary to extend the Social Relief of Distress Grant, yet it was confirmed in the 2024 Medium Term Budget Policy Statement parliamentary hearings that the grant had been provisionally funded.
Alternatives to VAT and budget cuts
There is a need for the National Treasury to move the burden of tax from low-income households to high-income earners, to ensure that the tax system is progressive. This entails considering proposals such as removing tax incentives for high-income earners and corporations, drawing down on the Gold and contingency reserve account (GFECRA), pausing Government Employees Pension Fund (GEPF) contributions, and taxing wealth effectively. Each of these proposals can be implemented and sequenced carefully, with some having the potential to unlock immediate revenue, while others are more medium-term.
Immediate measures to raise revenue
For instance, removing retirement fund tax deductions for those earning above R1 million could have raised approximately R51 billion in 2022/23 (equivalent to R60.4 billion in 2024/25). The current retirement fund system gives the highest income earners more tax breaks under the guise of trying to encourage savings. However, taking away some of these incentives will not harm people who will likely save for retirement irrespective of whether or not they get incentives from rebates.
Other additional measures that can raise revenue include cancelling the ineffective Employment Tax incentive (ETI). This is a measure to subsidise employment of low-paid young people. It has not resulted in any meaningful improvement in young people’s unemployment levels. But, in 2022/23, it cost the government R4.7 billion.
The government also lost about R13 billion from reducing the Corporate Income Tax, announced in 2022, an intervention that was meant to encourage investment. In the context of structural issues in infrastructure, logistics, and electricity, a reduction in CIT amounts to an increase in dividends and profits that do not add any social or economic benefit to the state.
Balance sheet measures
In 2024, the government drew down on a portion of the R500 billion from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA). This is a reserve account which helps manage gains and losses from changes in the rand value of South Africa’s foreign reserves and gold. The R150 billion was allocated towards debt payment. Since then, the account has increased to R390 billion. The government can further draw down on this account without any harm to households, and without eroding the R250 billion buffer set by the South African Reserve Bank (SARB) and the National Treasury. Moreover, National Treasury officials have confirmed that drawing on this account has had no negative impact on financial markets.
The GEPF currently holds over R2.4 trillion in assets and had a surplus of R60 billion in 2024. The Alternative Information and Development Centre (AIDC) has shown that pausing the GEPF’s government portion of the contributions would raise R53 billion. This is almost the same as the expected revenue from the two percentage point VAT increase, and the budget gap of R60 billion over the medium term. And this can be done without putting workers’ pensions at risk. The GEPF is currently 110% funded, meaning that it can pay all of its members if they were to retire at once, and they would still have some funds remaining. The GEPF policy requires the fund to be 90% funded, indicating that there are low levels of risk to the health of the fund and workers’ contributions.
Medium-term measures to raise revenue
A wealth tax in South Africa has been shown to have the potential to raise between R70 and R160 billion when levied at progressive rates of between 3% and 7%. That is about 1.5% of the GDP.
In the medium term, the government needs to tax wealth more effectively. Some lessons must be taken from Latin American countries such as Argentina, which has raised around R45 billion through a once-off wealth tax on individuals with assets above $2.4 million, just 0.02 % of the population. These funds were used to support COVID-19 pandemic recovery efforts. As a percentage of their GDP, since 2012, revenues from wealth tax have averaged 0.3% in Colombia and 0.9% in Uruguay, as shown in a forthcoming working paper from the Institute for Economic Justice (IEJ). Although these may seem like relatively small amounts, they are better alternatives than the regressive VAT hike. A wealth tax in South Africa has been shown to have the potential to raise between R70 and R160 billion when levied at progressive rates of between 3% and 7%. That is about 1.5% of the GDP.
Beyond a wealth tax, in 2021, the IEJ estimated that a reformulated financial transaction tax of 0.1%, but with a base broadened to include equity, interest rate, interest rate derivatives, and the commodity derivatives markets, would raise R41 billion.
Each of these measures should be carefully implemented and sequenced, ensuring that over time, the capacity of SARS is improved to bolster capacity, and measures such as capital controls are put in place to stem capital flight.
The need to rethink fiscal policy
There is a need to rethink the current fiscal policy framework to ensure that it is aligned with South Africa’s constitutional obligation to progressively raise maximum available resources and to protect socio-economic rights. This entails centering on the country’s fiscal strategy, job creation, unemployment, and hunger, and taking measures to raise revenue while ensuring that the wealthy pay their fair share. The National Treasury has long held the false view that there is no alternative to austerity. This is starting to change in light of resistance by civil society and other stakeholders. However, a shift from budget cuts to revenue must not be at the expense of the poorest in our society.
Zimbali Mncube is the Tax and Budget Policy Researcher at the IEJ.
