The 2% VAT hike Treasury kept quiet—And why they pushed for it

Key topics:.Budget speech that didn't happen was set to raise VAT from 15% to 17% starting 1 April 2025 to boost revenue.Proposed VAT increase was due to higher government spending on health, education, and more.Vulnerable households would have received grants and relief to mitigate VAT impact..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here..If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Kerry Lanaghan.From 1 April 2025, a 2% increase in the VAT rate was set to take effect, moving the current 15% VAT up to 17%. The 2025 Budget speech—which did not happen—outlined a 5.8% increase in consolidated government spending up to R2.6trn. It was necessary for the Treasury to find a way to combat that increase with an increase in revenue. However, the 2025 Budget speech, which was initially scheduled for 19 February, has been delayed to 12 March. This delay means that the planned tax changes, including the VAT increase, are now awaiting official confirmation..The proposed, but not approved, 2025 Budget outlined that the increase in expenditure is triggered by new, consistent spending pressures such as health costs, educator costs, childhood development and commuter rail services, and ensuring that the country's debt does not worsen. In the proposed budget review, the Treasury states that these expenses could not be avoided. At yesterday's media conference, Finance Minister Enoch Godongwana said, "As we speak, there's a threat of losing 19,000 teachers in KZN; frontline services are being eroded unless something is done." .Why specifically VAT? .The proposed Budget highlighted that the percentage of the GDP made up by personal income tax (PIT) in South Africa, as well as the high top tax rate, are both much higher than in other developing countries. Treasury stated that the previous increases in PIT did not raise the expected revenue. This was due to taxpayers' change in behaviour to avoid tax. Therefore, the Treasury argued that a VAT increase is more difficult to avoid, and the behavioural responses are lower, decreasing the economic impact. Treasury considered different options to raise the required revenue, such as increases in PIT and CIT. However, these would have had a more negative impact on employment, savings, investment and growth than VAT because CIT is ultimately paid by shareholders, consumers and workers, even though it is imposed on businesses. South Africa's contribution of CIT towards tax revenue is already high, and VAT is low compared to our peers. The average VAT amongst peer countries is 19%..What would have been done to combat the effects of the VAT increase?.Vulnerable households will receive direct relief from the government by increasing the disability grant, old age grant and child support grant by amounts larger than expected inflation. Zero-rated items will increase, including tinned vegetables, dairy liquid blends, and various types of meat. Road Accident Fund levy and general fuel levy will not be changed to limit increases in the cost of living. Personal income taxpayers in the bottom two brackets will be provided with full inflationary relief.Is the increase overburdening the middle class? During yesterday's press conference, Duncan Pieterse, Director General of National Treasury, emphasised how the middle class will not be overburdened. Pieterse stated that there is no increase in fuel levy to mitigate issues on the transport side, the PIT top four brackets get partial relief, and zero-rating goods benefit everyone even though it targets lower-income households. These points indicate an aspect of relief provided to the middle class. .South Africa budget unraveled after a key detail was kept secret.By Ntando Thukwana and Mike Cohen.South African Finance Minister Enoch Godongwana presented highlights of his upcoming budget to colleagues two weeks ago, but skipped a crucial detail to stop it from leaking — triggering a major fallout in the nation's coalition government..Godongwana flagged plans to hike value-added tax, without saying it would raise the rate by two percentage points to 17%. That information, shared with the cabinet hours before the budget was set to be delivered on Wednesday, caused a backlash that forced its last-minute delay..President Cyril Ramaphosa's coalition partner, the Democratic Alliance, and even some members of his African National Congress balked at the increase, which would have curbed consumer spending and output in a nation reeling under a 32% unemployment rate and sluggish economic growth. .The National Treasury's intention was to bolster revenue by 191 billion rand ($10.3 billion) over three years, helping contain national debt and fund infrastructure projects. A walkback would set back Godongwana's efforts to bolster government finances, given that he has very little room to maneuver. .It was "disingenuous" to say cabinet members weren't informed of the broad details of the Treasury's plans, and it was standard practice to withhold some key information to prevent it from leaking, the minister said on Wednesday after postponing the budget until March 12. "We said this was the direction we are likely to take and everyone was in jitters." .Some of the information the minister did disclose in advance to the cabinet made its way into the public domain, with the Johannesburg-based Sunday Times newspaper reporting that the government was planning to raise VAT by 1 percentage point, and Business Day revealing what the Treasury planned to do to mitigate the impact of the tax increase on the poor. .The issue came to a head after the extent of the hike was unveiled to the full cabinet at a stormy meeting shortly before Godongwana was due to deliver his speech. The delay was announced by parliament Speaker Thokozile Didiza, when it became apparent that insufficient consensus had been reached for the budget to pass. .The unprecedented postponement was announced eight hours after the budget documents were distributed to journalists under embargo. The Treasury later gave clearance to release the information, with the understanding that a revised document will be presented to lawmakers next month..The furor rattled investors and weighed on South Africa's currency and bonds. .The rand fell as much as 1% against the dollar in the immediate aftermath of the postponement, and closed 0.6% weaker on Wednesday at 18.5216. The currency retraced some of those losses on Thursday. The yield on 10-year government finished the day 8 basis points higher at 10.59%..'Significant concern'.Lobby group Business Unity South Africa said the delay was "a significant concern" and sent a negative message about the so-called government of national unity's ability to collaborate effectively and fulfill its crucial role in determining how to allocate resources..."It should have been apparent much earlier that the parties in the GNU were struggling to reach an agreement on the budget, and the postponement should have been announced sooner to avoid compromising the credibility of the National Treasury," said Khulekani Mathe, the group's chief executive officer.|.The drama unfolded as South Africa prepared to host foreign ministers from the Group of 20 nations in Johannesburg. The meeting — scheduled for Thursday and Friday — is a precursor to a heads-of-state summit in November that Ramaphosa will use to lobby for efforts to curb the excessive debt burden of developing nations and a greater commitment to dealing with climate change..Godongwana played down the risk of any damage to the country's reputation before the G-20 gatherings, saying "these people that are going to be here, they've got their own problems.".Alliance tensions.The ANC and the DA and eight smaller rivals teamed up after last year's elections failed to produce an outright majority. While they've also disagreed about education and health policy and the passage of a new land-expropriation law, they've downplayed suggestions that the government may collapse. .The budget delay "is ultimately a story of political, governance and process missteps overlayed on actually some great National Treasury policy making," said Peter Attard Montalto and colleagues at advisory service Krutham, noting the underlying fiscal discipline of the plan. "We do not see GNU stability risk here from this wobble," he said..Ramaphosa reassured the public that the budget process and his administration remain on track. ."The government of national unity will in the coming days and week intensify our efforts to balance the imperatives that drive the fundamental growth objectives of this administration," he said in a statement. "We are working as partners to ensure that the budget is one that works for individuals and investors alike.".Read also:.BN Briefing: Trump urged to exit SA from AGOA and cut all ties, Iran has NO nuclear energy for SA.SA's economic lifeline at risk: AGOA, U.S. tensions, and the high-stakes fallout – Neil Diamond🔒 US Congress pulls SA through the gutter in latest letter to President Trump.© 2025 Bloomberg L.P.

The 2% VAT hike Treasury kept quiet—And why they pushed for it

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