Finance Minister Enoch Godongwana, during his Budget Speech, proposed a 0.5% VAT hike for two consecutive 2025/26 and 2026/27 fiscal years in a bid to shore up the R58 billion budget deficit. Image: Armand Hough/Independent Newspapers
Image: Armand Hough / Independent Newspapers
AS South Africa gears up for the implementation of Budget 2025, the government’s proposal to increase the value-added tax (VAT) by 0.5 percentage points to 15.5% in May 2025, followed by another increase in April 2026, raises significant concerns.
This policy, expected to generate R43.3 billion over the next two fiscal years, reveals a dire dependency on tax hikes amid a struggling economy. Critics have argued that this approach lacks creativity and fails to address systemic issues, echoing the words of Finance Minister Enoch Godongwana during the Budget Speech, who acknowledged the urgent need for “the right fiscal choices today in the interest of South Africa’s tomorrow”.
Since the tabling of this year’s Budget Speech, South Africans have had time to scrutinise it along with its related documents, with diverse responses to key proposals and major decisions. As activities around the speech wind down and the budget documents make their way through Parliamentary processes, it is important to take a step back and consider some of the key macro factors surrounding the budget and how these interplay with the economy.
Now, more than ever, the country needs to focus on creating a more prosperous South Africa. Through its Ubuntu Bethu strategy, PwC leveraged its community of solvers to build trust and deliver sustained outcomes towards creating a more prosperous country.
In its latest report, “Responsible Growth for a Sustainable Future”, PwC emphasised the importance of “making the right fiscal choices today in the interest of South Africa’s tomorrow”.
The PwC report critically underscored that tax increases alone would not suffice. With “large fiscal deficits over the past decade” leading to excessive public debt, ministerial decisions should draw on deeper insights. Instead of merely raising taxes, policymakers need to consider effective alternatives for bolstering revenue.
One of the most glaring opportunities, according to the report, lay in addressing the country’s vast tax gap, estimated at between R400 billion and R450bn annually. “Closing the tax gap should be a priority,” the report stated, which pointed out that an optimistic reduction of this gap by just 10% in 2025/26 could net an additional R40bn to R45bn.
Kyle Mandy, PwC Africa technical and tax policy leader, said: “While it is unrealistic to expect that there would be no tax gap in South Africa, a gap of around 20% of theoretical revenues is high. If the country’s tax gap could be narrowed by only 10% in 2025/2026, that would give rise to an additional R40bn to R45bn in revenue and would remove the need for VAT increases.”
Another strategically viable solution mentioned in the report is revising the Southern African Customs Union (Sacu) revenue-sharing formula. In the fiscal year 2025/26, South Africa has been projected to forgo R73.5bn through duties shared among Sacu member states.
The growing sentiment that this formula is not conducive to South Africa’s fiscal health is palpable, as the report noted: “Failure to revise the Sacu formula is hardly surprising given that smaller member states rely heavily on these revenues.”
Restructuring this formula could provide the country with a more equitable share of revenue, ensuring that South Africa’s growing financial needs are met without compromising fiscal stability.
Plans around VAT increases, the size of the tax gap, and adjusting the Sacu revenue-sharing formula might be less of a focal point if South Africa’s economy was growing at a healthier pace, according to the report. Real GDP growth measured only 0.6% in 2024, down from an already paltry 0.7% in the preceding year.
Meanwhile, population growth exceeds 1% per annum, meaning real GDP per capita has now been declining for the better part of a decade.
Lullu Krugel, PwC South Africa’s chief economist, said: “South Africa’s private sector has in recent years forged strong cooperative relationships with the government in support of enabling key reforms in critical bottlenecks for economic growth. Work in energy, transport and logistics, and crime and corruption have had some positive results, though as the meagre economic growth numbers for 2023–2024 show, more work still needs to be done.”
She said there was a close relationship between nominal economic growth and tax revenue growth, with a long-term average of 1:1. So, if South Africa could get the economic levers right, it would help improve the course of the fiscal ship.
The report stated that building climate-resilient infrastructure amid these fiscal constraints would add yet another layer to the already complex debate. The Budget Review 2025 acknowledged the urgent need for “infrastructure that can withstand and adapt to the impacts of climate change”. With a projected R1 trillion earmarked for public infrastructure, South Africa’s economic future hangs in the balance.
Chantal van der Watt, PwC South Africa’s director for sustainability, said: “Climate-resilient infrastructure includes the design, construction, and maintenance of infrastructure systems that can withstand and adapt to the impacts of climate change. With extreme weather events becoming more frequent and more severe, South Africa needs roads that can handle heavier rains, bridges that can withstand the torrent of more severe flooding in rivers, and power grids that do not buckle under increasingly stronger winds.”
However, frequent references in Budget Review 2025 to infrastructure spending were not accompanied by discussions about the impact of climate and weather on infrastructure. This was because, while the country wants to increase funding for climate-resilient infrastructure, the fiscus cannot afford to financially support the amount of investment that is required.
Key considerations to improve infrastructure resilience include:
As South Africa approaches May 2025, the urgent need for innovation in revenue generation, infrastructure resilience, and comprehensive climate strategies has never been clearer. Addressing the tax gap, revising the Sacu revenue-sharing formula, and rebuilding trust in the SA Revenue Service (Sars) are all paths that policymakers must embrace.
The question remains: Will the government enact the bold reforms needed to transform its economic landscape, or will it succumb to the politically easier path of tax increases that may further alienate an already burdened populace?
If true growth is to be realised, policymakers need to confront these pressing challenges with an unwavering commitment to accountability and prudence — because the future of the country depends heavily on it.
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