South Africa’s decision to reverse its proposed VAT hike has left it with a R75 billion deficit in the national budget. The government initially hoped the VAT increase would help to reduce the deficit. After considerable public and political pushback, however, the government abandoned the plan. They were left with the difficult task of finding other ways to balance their books.
The country’s fiscal outlook has been thrown into question by this VAT U-Turn. How will the government cover the R75 billion deficit? Can they prevent pushing South Africa’s fragile economy further into crisis?
What happened with the VAT increase?
The VAT U-turn refers to the decision of the government to abandon its proposal to increase the VAT rate to 16% from 15%, which had been planned to generate R75 billion in revenue over a three-year period. The money was intended to reduce South Africa’s fiscal deficit, which is growing due to factors like the COVID-19 epidemic and economic challenges.
The proposal, however, was met with strong resistance from both political parties and groups of civil society, who claimed that the increase in VAT would adversely affect households with lower incomes. The government reversed its decision in response to mounting pressure. Enoch Godongwana, Finance Minister, confirmed the decision on April 24, 2025. He stated that it had been made after consultations between political parties. However, it raised serious concerns regarding South Africa’s financial handling.
The Budget Immediate Effect
South Africa’s finances are left with a large hole after the reversal of the VAT hike. The government originally hoped that the R75 billion would be used to bridge the deficit and reduce South Africa’s debt. The government now has to find other revenue sources as this option is no longer an option.
South Africa’s debt has reached alarming levels. It is now over 80% of GDP, and its economic growth forecasts for 2025 have been reduced to just 0.8%. Analysts warn that if the R75 billion shortfall is not addressed, South Africa could face more serious financial challenges, including increased debt levels and decreased investor confidence.
Ann Bernstein of the Centre for Development and Enterprise, CDE, highlighted the severity of the situation. “Up until now, the National Treasury was seen as a stronghold for democratic South Africa. But this debacle has undoubtedly undermined confidence in the ability of its management of the budget.
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Where will the government find the R75 billion?
South Africa now has to find other solutions for the budget deficit. There are many possible strategies. Each has its own challenges and implications. Explore some of the best options.
1. Cutting Wasteful Expenditure
Spending wastefully by the government is one of the easiest ways to reduce deficits. South Africa’s government has been criticised for its inefficiency, including excessive expenditure on non-essential services, mismanaged SOEs, and bureaucratic waste.
Maarten Ackerman is Citadel’s Chief Economist. He stressed that the government should focus on cutting wasteful expenses without compromising vital services. This is a necessary but difficult step for South Africa to reach fiscal stability.
There is plenty of room to improve, particularly in areas such as overseas travel, consulate expenditure, and reducing inefficiency within government departments. Any attempt to reduce spending on critical sectors such as health, education or police services will likely cause political opposition and make these cuts difficult.
2. Increase Taxes on the Wealthy
One solution would be to raise taxes on the wealthiest South Africans. There is a progressive system of taxation in South Africa, where the higher income earners pay more. However, there could be room for adjusting tax rates and closing existing loopholes.
This approach, although controversial politically, could generate significant revenues without burdening South Africans with lower incomes. Some experts believe that raising taxes on the rich is a fair and effective way to reduce South Africa’s persistent inequalities while also helping to stabilize government finances.
Critics worry, however, that higher taxes may discourage investment or cause wealthy individuals and companies to look for tax havens. To avoid unintentionally damaging the economy, any tax increases would have to be carefully considered by the government.
3. Reforms in the Public Sector and Efficiency Gains
South Africa’s government is frequently criticized for its inefficiency and poor management. State-owned enterprises like Eskom require regular bailouts by the government. Reforming these institutions and improving the efficiency within government departments can help to reduce the fiscal burden and release much-needed resources.
The National Treasury already has reforms in place to streamline SOEs and reduce their dependence on government assistance. Restructuring or privatizing SOEs that are failing could, for example, save taxpayers billions of dollars. These reforms will require a strong political commitment and could face opposition from other stakeholders and unions.
In addition to SOEs and government agencies, improving efficiency in areas such as procurement, administration, or social grants can also reduce unnecessary costs. To achieve these improvements, however, will require substantial investments in technology and a new way of delivering government services.
4. SARS – Boosting Tax Revenue
In recent years, the South African Revenue Service has improved its efforts to collect taxes. SARS is likely to focus more on tax compliance and evasion with the VAT U-turn.
SARS has collected an extra R10 billion in this year. This figure could grow. SARS can play a major role in filling the R75 billion shortfall by improving tax compliance and cracking down on non-payment. It’s unlikely, however, that increased tax collections alone will cover the entire shortfall.
The Political Impact of the VAT U-Turn
Reversing the VAT hike has had important political implications. Enoch Godongwana, Finance Minister, has defended his decision by stating that he made it after consulting with all parties. However, this has caused friction between the African National Congress and its coalition partners.
Godongwana, a government official, said that the fiscal policies of the government must be based not on public outcry, but rather on sustainability.
The political fallout of the VAT reversal may have long-lasting consequences. The government must navigate through this turbulent period while implementing measures that will help restore fiscal stability, economic confidence, and financial stability.
What’s Next?
The decision by South Africa to reverse its VAT increase left a large hole in the budget. Now, the government has to find a way to cover the R75 billion deficit. Cutting wasteful spending, increasing taxes on the rich, improving efficiency in the public sector, and boosting revenue through SARS all represent potential solutions. However, they each come with their own challenges.
The government should carefully weigh its options and make decisions that will not only close the fiscal gap in the short term but also provide long-term financial stability. South Africa’s future economic success will be determined by how the government makes these difficult decisions.
The coming months are crucial for the future of the country as it continues to face its fiscal challenges. The next steps taken by the government will determine if it can regain investors’ confidence, reduce its burden of debt, and steer the nation toward a more prosperous and stable future.
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