Scrapped VAT hike to lift SA’s economic outlook and consumer spirits

Following ActionSA’s announcement that it had succeeded in eliminating the proposed value-added tax (VAT) hike of 0.5 percentage points, which would have come into effect this May, South Africans will see lower inflation and are likely to be more optimistic. 

The political party, which has six seats in Parliament, said last night as talks continued in a bid to achieve consensus among Government of National Unity members ahead of today’s Budget Vote, that it had achieved a “major victory”. In a statement, it said that the proposed VAT hike “has been effectively scrapped”.

The potential of a VAT hike has been a bone of contention among political parties, with the initial suggestion that the tax be raised from 15% to 17% causing a historic moment when the National Budget was not passed in the National Assembly in February. A revised Budget was presented last month, lowering the proposal to 0.5 percentage points for each of the next two years. 

Annabel Bishop, Investec chief economist, said that the removal of VAT would improve consumer confidence. She noted that the risk of increased inflation because of higher VAT had already negatively affected consumer sentiment. 

Consumer sentiment collapsed last quarter, overall and in all three sub-sectors of household financial and economic outlooks, along with the suitability of the present time to buy durable goods, Investec noted recently. It said that sentiment would likely become less depressed based on a lower rate of the tax increase.  

Investec’s calculations indicated that a 0.5 percentage point increase in the value-added tax for each of the next two years would have added 0.25 percentage points to inflation for each year. Inflation is currently at 3.2% as of February on a year-on-year basis. 

Old Mutual chief economist Johann Els said that inflation is likely to remain low this year and could drop below 3% again in the current quarter. The South African Reserve Bank’s most recent statement on interest rates, on March 20 indicated that it expected with headline inflation of 3.6% this year and 4.5% for 2026. 

Yet, Els said that the proposed VAT increase would have had a negligible impact on the consumer. Basing his comments on the 2018 hike in value-added tax, when it went from 14% to 15%, he said that less than a third of this increase was passed through to consumers at the till. 

“While one would assume smaller retailers, bazaar shops, etc. passed on more than the one percentage point VAT increase, big retailers passed on significantly less, obviously wanting to protect their volumes. So, they absorbed the cost of the VAT rate increase mostly into their profit line,” said Els.

Els also noted that several indicators are pointing to the fact that South Africans are generally better off than they were a year ago, such as South African Reserve Bank data out last week, which showed that nominal disposable income growth is running ahead of inflation.

“What I'm unclear about is if the VAT rate increase on May 1 does not go through, does that mean they'll reverse some of those extra zero ratings that they wanted to do in terms of tinned vegetables, bottled vegetables, some of the cheaper meat cuts, etc,” Els added.

National Treasury indicated earlier this year that, to shield poorer people from the proposed VAT hike, it sought to expand the basket of zero-rated items to include edible offal of sheep, poultry, goats, swine and bovine animals; specific cuts such as heads, feet, bones and tongues; dairy liquid blend; and tinned or canned vegetables. 

Currently, food items such as brown bread, maize meal, rice, vegetables, fruit, and milk are exempt from VAT.

The March 2025 Household Affordability Index, published by the Pietermaritzburg Economic Justice and Dignity Group (PEJDG), found that, had the VAT increase of 0.5 percentage points been implemented already, it would have increased the tax value of its index basket from R323.50 to R334.28.

VAT, it said last month, already accounts for 6.1% of the household food basket. “The total rand-value of VAT on basic food stuffs is high relative to the amount of money families have available to spend on food. VAT on basic foods removes money from the purse that could be spent on more food, better diversity of food, and better-quality food,” the Group added. 

Based on the PEJDG’s figures, the total cost of its food basket would have increased 0.4%. This basket includes vegetables like onions, carrots and butternut as well as maize meal, sugar beans, samp, cooking oil, frozen chicken portions, curry powder, and wors.

However, for a home in which there are four people, only one of whom is employed and at the national minimum wage level, its data shows a 47.4% shortfall in nutritious food, with an available amount to spend that is below the food poverty line, the Group said. Currently, almost a third of all working-age South Africans are unemployed according to Statistics South Africa.

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