The government has proposed a phased increase to the Value Added Tax (VAT) rate to address revenue shortfalls. A 0.5 percentage point increase is proposed for the 2025/26 fiscal year, followed by an additional 0.5 percentage point increase in 2026/27, bringing the total VAT rate to 16 percent.
In addition, the government proposes no inflationary adjustments to personal income tax brackets, rebates, and medical tax credits. These measures are projected to generate R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27.
The government acknowledges the importance of a lower overall tax burden for investment, job creation, and household spending. However, the pressing need for service delivery to achieve developmental goals necessitates these revenue-raising measures.
Rationale for VAT Increase
Alternatives to raising the VAT rate were thoroughly examined. Increasing corporate or personal income taxes was deemed less effective in generating revenue and could potentially harm investment, job creation, and economic growth. Corporate tax collections have declined, reflecting falling profits and a challenging trading environment. Furthermore, the nation's corporate income tax collections are already relatively high compared to peer countries. An increase in personal income tax rates could reduce taxpayer incentives to work and save, as the top personal income tax rate and personal income tax collections as a percentage of GDP are already elevated compared to many developing nations.
Taking on additional debt was also considered unfeasible due to the significant amount required and the high cost of borrowing, which could lead to further credit rating downgrades.
VAT, as a tax affecting all consumers, was chosen due to its broad distribution. The marginal increase was deemed the most effective way to avoid further spending cuts and maintain social programs.
Measures to Cushion Households
The government recognizes the cost-of-living pressures faced by households, including high food and fuel prices and rising utility costs. To mitigate these impacts, the following measures are proposed:
- Social grant increases above inflation.
- Expansion of the VAT zero-rated food basket to include canned vegetables, dairy liquid blends, and organ meats.
- No increase in the fuel levy for another year, saving consumers approximately R4 billion.
Property Market Considerations
Transfer duty thresholds have been adjusted to account for property price inflation. The threshold below which transfer duty is not payable has increased by 10%, from R1.1 million to R1.21 million. This adjustment is intended to provide relief to property buyers. There are no changes to the Capital Gains Tax on the sale of residential property.
The increase in VAT will affect VAT-inclusive services associated with property purchases, and new-build units.
The national budget highlights the need for infrastructural improvements, particularly in energy, water, sanitation, and transportation, to promote economic growth and attract investment.
Overall Fiscal Outlook
The budget aims to balance revenue generation with the need to protect vulnerable households and stimulate economic growth. Concerns have been raised regarding the lack of measures to reduce public sector spending and the continued budget deficit. The budget deficit is projected to decline from 5% of GDP to 3.5% of GDP over the next three years. The national debt as a percentage of GDP is expected to decrease slightly, while debt servicing costs are projected to increase.
The lack of inflationary adjustments to personal income tax brackets and medical tax credits will also put pressure on citizens. The primary focus of the budget is to achieve fiscal consolidation and promote economic growth.
The big question now, "Will the budget be passed in parliament?" With the majority of political parties voicing their displeasure, will the budget get the necessary votes...?
