With South Africa facing persistent fiscal deficits, sluggish economic growth, and increasing pressure to fund social programmes, the government proposed increasing 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 would have far-reaching implications.
VAT is South Africa’s second-largest source of tax revenue, contributing about R400 billion annually or about 30% of total tax revenue (National Treasury, 2023). A two-percentage-point increase could, in theory, generate an additional R50bn to R80bn a year, 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); and
- 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.
South Africa’s official unemployment rate stands at 32.1%, but if discouraged job seekers are included, the expanded definition exceeds 40% (Statistics SA, 2024). The average South African earns about R14 000 a 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; and
- force businesses to cut costs, leading to potential retrenchments and business closures.
A 2018 study by the South African Reserve Bank found that the previous VAT hike, from 14% to 15%, resulted in a 0.7% decline in consumer spending and a rise in inflation of 0.5%. A two-percentage-point hike would likely double these effects.
South Africa’s coalition government remains deeply divided, with no consensus on major fiscal policies. 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; and
- 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.
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 R150bn a year, could suffer severe losses;
- the rand could weaken further, leading to imported inflation; and
- 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:
- Improve tax compliance and enforcement
- SARS estimates that tax evasion and under-reporting cost the economy more than R100bn a year.
- Strengthening tax compliance, particularly in the informal economy and corporate sector, could generate more revenue than a VAT increase.
- Reduce government expenditure and corruption
- South Africa loses R50bn to R100bn annually to corruption and wasteful expenditure (Auditor-General’s report, 2023).
- Addressing inefficiencies in state-owned enterprises (Eskom, Transnet, PRASA) could free up billions for public spending.
- Expand the tax base through growth policies
- Encouraging investment in manufacturing, renewable energy, and technology could generate sustainable revenue.
- 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.
Although 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.
Willem Oberholzer is a director at Kisch Tax Advisory.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
