VAT increase reversal seen as a step towards economic stability in South Africa

In a significant policy reversal, the South African Treasury announced on Thursday that it will no longer proceed with the planned 0.5% increase in Value Added Tax (VAT), which was scheduled to take effect at the beginning of May. 

This decision has been widely welcomed by opposition parties and analysts, signalling a potential shift toward more sustainable and growth-oriented fiscal policies amid ongoing economic challenges.

Background: The Controversial VAT Proposal

Finance Minister Enoch Godongwana initially proposed the VAT increase as part of the 2025/26 national budget, aiming to raise an additional 2% in revenue - approximately R40 billion - to help close South Africa’s widening fiscal deficit. 

The government argued that this measure was necessary to stabilise public finances and fund critical social programs.

However, the proposal met immediate resistance from opposition parties, trade unions, and civil society organisations. 

Critics warned that a VAT hike would disproportionately impact low-income households, which spend a larger share of their income on essentials.

 According to Statistics South Africa, nearly 40% of households live below the poverty line, making them highly vulnerable to rising living costs.

After intense parliamentary debate, the initial 2% increase was rejected. 

The Treasury proposed a modest 0.5% increase as a compromise, which still sparked fierce opposition. 

Business leaders and consumer groups expressed concerns that even this small hike could dampen consumer spending, which accounts for about 60% of GDP, and hinder economic recovery.

The Reversal: A Win for Economic Stability and Social Equity

On Thursday morning, the Treasury announced it would abandon the VAT increase altogether, citing the need to prioritize economic stability and consumer welfare. 

Finance Minister Godongwana stated, “Given the current economic environment, we believe it is in the country's best interest to hold off on any tax increases that could further dampen growth and social stability.”

This decision marked a strategic pivot away from austerity measures that could have risked stalling economic recovery.

It also signals a recognition among policymakers that short-term revenue gains should not come at the expense of long-term growth and social cohesion.

Opposition parties, including the GOOD party, IFP, ANC, BOSA, ActionSA, PAC, and IFP, lauded the move in a joint press briefing in Sandton on Thursday, emphasising that the VAT hike would have disproportionately affected the poor and vulnerable populations. 

Independent analyst Sandile Swana welcomed the reversal, stating, “This shows a maturing fiscal policy thinking. The government is starting to understand that sustainable growth requires investment, not austerity or regressive taxes.”

Swana emphasised that reversing the VAT hike should accompany a comprehensive economic strategy centered on infrastructure investment and job creation. 

He highlighted the need for a stimulus package of at least R700 billion over the next decade, focusing on key sectors such as energy, transport, and digital infrastructure.

“South Africa needs to unlock its productive capacity,” Swana explained. “Investing in infrastructure creates immediate employment and enhances long-term competitiveness, especially within the BRICS alliance.”

He further stressed that shifting focus from tax hikes to empowering institutions like the South African Reserve Bank could facilitate targeted investments. 

“Maintaining a minimum of 30% of GDP in capital formation is crucial for technological advancement and reducing reliance on external borrowing,” he added.

Political and Economic Implications

The reversal reflects a changing political landscape, where opposition parties increasingly assert oversight and demand fiscally responsible policies.

“The era of passive approval of budgets is ending. Parliament is taking its oversight role seriously, vital for fiscal discipline and accountability.”

Political analyst Joe Mhlanga said that was a good initiative but warned that the process still needs to be engaged in parliament with all the parties involved.

“But the fact that South Africa’s current fiscal position - characterized by a debt-to-GDP ratio approaching 70% - necessitates prudent management’” said Mhlanga.

While avoiding tax increases now, the government must focus on broadening the tax base, improving revenue collection, and implementing structural reforms to stimulate growth.

thabo.makwakwa@inl.co.za

IOL Politics