By Willem Oberholzer, Director, KISCH Tax Advisory  

Introduction 

With South Africa facing persistent fiscal deficits, sluggish economic growth, and increasing pressure to fund social programmes, the government is reportedly considering a 2% increase in the VAT rate, from 15% to 17%. Proponents argue that such a measure could raise much-needed revenue, while critics warn of severe economic repercussions. Given the country’s high unemployment rate, low consumer disposable income, fragile political landscape, and the looming threat of US sanctions, the proposal could have far-reaching implications. 

Adding to the uncertainty, for the first time in living memory, the South African budget was not tabled, reflecting deep discord within the coalition government. Political fragmentation and internal divisions raise serious concerns about fiscal governance, further compounding the risks of a VAT hike. 

A Revenue-Boosting Measure? 

VAT is South Africa’s second-largest source of tax revenue, contributing approximately R400 billion annually or about 30% of total tax revenue (National Treasury, 2023). A 2% increase could, in theory, generate an additional R50-R80 billion per annum, helping to: 

• Reduce the budget deficit, which currently exceeds 4.5% of GDP. 
• Stabilise public debt, projected to reach 73% of GDP by 2026 (SARB, 2023). 
• Fund critical social welfare programmes in healthcare, education, and infrastructure. 

However, raising VAT is a blunt instrument. It disproportionately affects low- and middle-income consumers, who spend a larger share of their income on VAT-inclusive goods, exacerbating inequality and economic hardship. 

The Economic Fallout 

High Unemployment and Low Wages 

South Africa’s official unemployment rate stands at 32.1%, but if discouraged job seekers are included, the expanded definition exceeds 40% (Stats SA, 2024). The average South African earns around R14,000 per month, yet a large portion of the population earns far less. A VAT increase would: 

• Erode real wages, worsening the cost-of-living crisis. 
• Reduce household consumption, particularly on non-essential goods. 
• Force businesses to cut costs, leading to potential retrenchments and business closures. 

A 2018 study by the South African Reserve Bank (SARB) found that the previous 1% VAT hike (from 14% to 15%) resulted in a 0.7% decline in consumer spending and a rise in inflation of 0.5%. A 2% hike in 2025 would likely double these effects. 

Political Risks: Coalition Government Gridlock and Budget Uncertainty 

South Africa’s coalition government remains deeply divided, with no consensus on major fiscal policies. The internal discord raises the unprecedented risk of a delayed budget—something that has never occurred in modern South African history. 

The implications of such political gridlock include: 

• Budget approval delays, as opposition parties (EFF, DA, IFP) strongly oppose a VAT hike. 
• Uncertainty in financial markets, with investors wary of potential fiscal instability. 
• Protests, led by trade unions such as COSATU and NUMSA. 
• Increased pressure for populist policies, such as wealth taxes or land expropriation. 

When Ghana raised its VAT from 10% to 12.5% in 1995, mass protests forced a reversal. South Africa could face similar turmoil, but with the added complication of governance paralysis stemming from coalition infighting. 

The International Dimension: US Sanctions Risk 

A significant but often overlooked factor is the potential imposition of US sanctions on South Africa. The US has hinted at removing South Africa from the AGOA (African Growth and Opportunity Act) trade programme, which grants duty-free access to American markets. 

If the US imposes trade restrictions: 

• South Africa’s exports (valued at R150 billion per year) could suffer severe losses. 
• The rand could weaken further, leading to imported inflation. 
• Foreign investors could withdraw capital, further slowing economic growth. 

In such a scenario, raising VAT could exacerbate economic contraction, as businesses and consumers grapple with both domestic tax burdens and international trade constraints. 

Alternatives to a VAT Hike 

Rather than raising VAT, the government has several alternative revenue-generation strategies: 

1. Improved Tax Compliance & Enforcement 

•  SARS estimates that tax evasion and underreporting cost the economy over R100 billion per year. 
•  Strengthening tax compliance, particularly in the informal economy and corporate sector, could generate more revenue than a VAT increase. 

2. Reducing Government Expenditure & Corruption 

• South Africa loses R50-R100 billion annually to corruption and wasteful expenditure (Auditor-General Report, 2023). 
• Addressing inefficiencies in state-owned enterprises (Eskom, Transnet, PRASA) could free up billions for public spending. 

3. Expanding the Tax Base Through Growth Policies 

•  Encouraging investment in manufacturing, renewable energy, and technology could generate sustainable revenue. 

4. Targeted Wealth Taxes on High-Net-Worth Individuals 

•  A progressive wealth tax on assets exceeding R50 million could generate additional revenue without harming low-income consumers. 

Conclusion

While increasing VAT may appear to be an efficient revenue-generation tool, it would significantly harm consumers, businesses, and the broader economy. Given South Africa’s high unemployment, weak political cohesion, and external economic pressures, a VAT increase would likely worsen economic hardship rather than solve fiscal problems. 

Instead, policymakers should pursue alternative revenue strategies, focusing on improving tax compliance, reducing government waste, and fostering economic growth. A more sustainable and inclusive approach is needed to ensure that South Africa’s fiscal policies do not come at the cost of economic stability and social well-being. 

Sources & References: 

1. National Treasury (2023) – Budget Review Report. 
2. Stats SA (2024) – Quarterly Labour Force Survey. 
3. South African Reserve Bank (SARB) (2023) – Macroeconomic Impact of the VAT Rate Increase. 
4. South African Revenue Service (SARS) (2023) – Tax Compliance and Evasion Reports. 
5. Auditor-General of South Africa (2023) – Report on Wasteful Expenditure in Government. 
6. World Bank (2023) – South Africa Economic Update. 
7. United States Trade Representative (2024) – AGOA Review & Sanctions Considerations.