Budget Speech 2025: Why Godongwana Pushed for a 2% VAT Increase & Its Impact on SA

The much-anticipated yet undelivered Budget Speech 2025 by Finance Minister Enoch Godongwana introduced a major tax policy shift—an increase in VAT by 2%, bringing it to 17%. While the Treasury framed the hike as a necessary measure to support public services and social welfare, many experts warn of its regressive impact on South Africans, particularly in the face of rising living costs.

The Rationale Behind the 2% VAT Increase

Godongwana’s Budget Speech 2025 was going to detail how several unexpected and persistent spending pressures in health, education, transport, and security have emerged since October. In response, the government faced three options:

1. Cutting funding to essential services;
2. Taking on more debt, further burdening future generations;
3. Implementing strategic tax adjustments.

Treasury opted for the third option, arguing that the 2% VAT increase was the most responsible approach to ensure adequate funding for crucial services. According to the speech, the revenue generated from this increase would help fund:

• A 5.5% public sector wage increase for civil servants;
• Expansion of early childhood development programs;
• Retention of teachers, doctors, and frontline workers;
• Revitalization of the commuter rail system;
• Above-inflation social grant increases.

The Impact of the VAT Increase on South Africans

The decision to increase VAT is controversial because consumption taxes disproportionately affect lower-income households. While the government argues that the additional revenue will benefit the most vulnerable, the immediate effects will be felt through:

• Higher inflation, as businesses pass on costs to consumers;
• Potential repo rate hikes, leading to increased debt servicing costs;
• Increased prices on non-zero-rated goods and services, making everyday expenses more costly.

ALSO READ: How a 2% VAT Increase Would Impact South African Households & Living Costs

Alternatives to Increasing VAT

According to the Budget Speech 2025, the Treasury explored other tax policy options, including raising corporate or personal income taxes. However, these alternatives were dismissed due to concerns over economic growth and investment.

• Corporate tax increases could discourage investment and job creation, leading to lower revenue in the long term.
• Taking on more debt was deemed unsustainable, given South Africa’s junk credit rating and already high debt-servicing costs.

In contrast, the 2% VAT increase was presented as a more efficient and broad-based approach that aligns with international standards while securing long-term economic stability.

Government’s Measures to Alleviate the Burden

Aware of the financial strain the VAT hike will impose, Treasury proposed relief measures to protect lower-income households:

• Expanding the VAT zero-rated food basket to include tinned vegetables, dairy liquid blends, and certain meat products;
• Extending fuel levy relief for another year, saving consumers an estimated R4 billion;
• Increasing social grants above the inflation rate;
• Adjusting personal income tax brackets to provide relief for lower earners.

Additional tax adjustments include partial income tax bracket changes, while duties on alcohol and tobacco will see above-inflation hikes.

Historical Context of VAT in South Africa

South Africa introduced Value-Added Tax (VAT) on 30 September 1991, replacing sales tax. Initially set at 10%, VAT was raised to 14% in 1993 and further increased to 15% in April 2018. The latest 2% VAT increase marks the first adjustment in over six years, bringing South Africa’s rate closer to global norms, as over 160 countries have a VAT system.

The Budget Speech 2025 attempted to justify the 2% VAT increase as a necessary and responsible move to support essential public services. However, the decision has sparked debate, as higher VAT will inevitably lead to increased living costs, affecting all South Africans, particularly the poor. While the government has introduced mitigating measures, the long-term economic and social consequences remain to be seen.

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