Tax, VAT and Inflation

The ANC-led GNU government urgently requires additional tax revenue to fund both existing and new expenditures, including:

• The continuation of the R370 monthly Covid-19 relief grant, known as the Social Relief of Distress grant (SRD).
• The implementation of a Basic Income Grant (BIG).
• The rollout of the National Health Insurance (NHI).
• The establishment of a R100 billion BEE transformation fund.
• The suspension of all US aid to South Africa, including PEPFAR support for combating HIV/AIDS and Tuberculosis.

Finance Minister Enoch Godongwana acknowledged in parliament that these financial commitments further strain the government’s already limited resources amidst a stagnant economy and high unemployment. This situation necessitates increased income through taxation or borrowing to meet South Africa’s developmental goals.
To balance the budget, the government must consider several options:

• Maintain current tax rates while reducing expenditures and reprioritising essential services.
• Keep tax rates steady while borrowing more to fund existing and new budgetary items.
• Raise taxes while also increasing borrowing to meet all budgetary needs.
• Gradually increase taxes, pursue careful international borrowing, and cut back on spending in line with available funds.

These options leave the ANC-led GNU government with little flexibility to achieve a balanced budget that satisfies its coalition partners and other parliamentary members. The minister also noted that the current tax burden on citizens is already significant, leaving little room to raise corporate income tax rates further. An increase could lead businesses to relocate to countries offering more favourable tax environments for foreign investment.

In addressing these challenges, the minister proposed a modest approach to increasing tax revenues without significantly harming the economy. He announced a 0.5% increase in the VAT rate for the 2025/26 fiscal year, with an additional 0.5% increase planned for the following fiscal year. Additionally, he did not allow for inflationary adjustments to the tax brackets for the second consecutive year and kept medical aid tax credits static from the previous fiscal year. These decisions will result in an estimated net gain of R28 billion for the government due to inflation, known as bracket creep—a method of increasing taxes without consternation from the public.

The VAT increase can be precisely quantified when comparing inflation and changes to the VAT rate across fiscal years. Two distinct baskets were analysed to measure the impact of the VAT rate increase from 15.0% to 15.5% and ultimately to 16.0% on household budgets: one basket representing discretionary spending (groceries) and another reflecting administered prices (municipal accounts). These analyses provide insight into how inflation and higher VAT rates erode household purchasing power.

The discretionary basket for an assumed “middle-class” household includes various goods consumed over a specific timeframe, assessed in terms of VAT, the VAT increase, and anticipated inflation between 2025 and 2026 as illustrated in the Fig 1.

The anticipated changes in the average household’s budget from 2025 to 2026, given inflation and VAT adjustments, are illustrated in the accompanying tables.

Table 1: Household Discretionary Basket of Goods

The effects of inflation and the VAT increase become evident when calculating the household administrative basket, as reflected from 2025 to 2026.

Table 2: Household Administrative Basket of Goods and Services

The data from both tables clearly indicates that the average household budget will be significantly impacted from 2025 to 2026. Specifically, household consumption costs are projected to rise from R6,937 in 2025 to R7,676 in 2026, representing an annual increase of approximately 10.7% due to inflation and the VAT hike.

These rising costs for average households are likely to raise concerns among parliamentarians, particularly regarding their effects on low-income and vulnerable populations in South Africa. The proposed budget is currently under consideration in parliament, where it will be voted on to determine whether it will be adopted or returned for revisions to meet the required quorum for approval and implementation in the 2025/26 fiscal year.