SA Budget 2025: SMEs left in the cold as VAT hikes loom

Tawanda Korombo

Small-scale to medium enterprises play a pivotal role in South Africa’s economy but they may well have been forgotten when Finance Minister Enoch Godongwana delivered his 2025 Budget Speech this week.

Shawn Theunissen, the founder of Property Point and eTTP, said the 2025 budget statement “was a missed opportunity to leverage SMEs as a catalyst for economic growth and job” creation.

“Instead of bold action, we saw vague commitments and a lack of urgency on the issues that matter most to small businesses,” he said.

The 0.5% VAT increase proposed for 2025/26, rising by another 0.5% the following year was expected to add an additional direct financial strain on SMEs. The hike in the VAT rate will increase operational costs for small businesses and further squeeze profit margins at a time when consumer spending is already weak.

Worse still, said Garth Rossiter, the chief risk officer for SME services provider, Lula, “there was not one single mention of small business or SMEs” during the Finance Minister’s Budget Speech. This was despite the importance of SMEs within the economy as small business owners make up the biggest employer segment in the country.

“They are forced to make job cuts to keep the doors open while public sector wages are increased. This is hard to stomach and particularly tone-deaf,” says Rossiter.

Although no formal tax increases were announced, the adjustment of tax brackets for inflation means that individuals will end up paying more.

South Africa’s economic environment continued to pose significant challenges for small and medium enterprises, said Rossiter, highlighting that liquidations of SMEs sharply rose last year.  

“Liquidations have jumped quite significantly towards the end of last year. We are seeing a lot more businesses applying for business rescue,” explained Rossiter.

With the past year marked by stagnant growth, high interest rates, and mounting financial pressures, turnover for small businesses had fallen by more than 50% in the past 12 months.

“The past year has been one of survival for many South African SMEs. Economic stagnation, high interest rates, and declining consumer spending have created an unforgiving business landscape. Yet with resilience and strategic financial management, SMEs can position themselves for recovery and future success,” says Rossiter.

There were, however, some positives for SMEs in the budget statement. The increased spending on infrastructure was something the SME sector has been pleading for as it contributes to its ability to create jobs and create employment opportunities for South Africa.

Others expected the R100 billion Transformation Fund and R20 billion in SME funding initiatives touted in the past few months to be fast-tracked, yet there was no clarity from Treasury on the timelines and accessibility of these funds.

Similarly, said Theunissen, the Public Procurement Act (2024), which mandates that 40% of state contracts be awarded to SMEs, was barely addressed. This raised concerns that SMEs will continue to be excluded from government procurement opportunities, with large corporations dominating the bidding process and corruption continuing.

“Government procurement should be a growth driver for SMEs, but without clear implementation measures and strict enforcement of payment timelines, it remains a broken system,” said Theunissen.

Delays in government payments to SMEs remain a major challenge, despite past promises to enforce the 30-day payment rule. This issue has been raised repeatedly in previous Budgets, yet many small businesses continue to experience long waits for payments, leading to severe cash flow constraints.

SME White Paper

A new white paper released this week by Lula, titled SME Survival in a Harsh Economic Climate: The State of South African SMEs in 2025, says these enterprises face a persistent credit crunch, with SMEs grappling with high borrowing costs stemming from elevated interest rates earlier in 2024.

Despite the South African Reserve Bank (SARB) initiating rate cuts later in the year, the relief comes too late for many businesses already saddled with debt, the paper shows.

High levels of gearing have left SMEs vulnerable to interest rate swings, forcing them to pay a premium on loans taken to cover stock, materials, or operational expenses. This financial strain has been compounded by a low-inflation environment, pushing businesses to slash prices or write off debts, further eroding their margins.

The white paper also flags a troubling rise in debtor days, now at their highest since quarter two 2022, signaling delayed cash flows that stifle SMEs’ ability to reinvest in growth or innovation. Unlike larger corporates with the leverage to enforce quicker payments, SMEs lack the clout to expedite collections, leaving them in a precarious double bind.

The report also says SMEs have a unique economic cycle, where recovery tends to lag behind that of consumers, a dynamic worsened by the prolonged financial stress of 2024. While the SARB’s rate cuts offer a glimmer of hope, the depth and speed of these reductions will determine whether SMEs can claw back stability in an economy still reeling from structural challenges.

Looking ahead, the paper says the formation of a Government of National Unity following last year’s elections has bolstered investor sentiment, while planned infrastructure investments could unlock opportunities in sectors like construction and manufacturing.

Yet, uncertainty looms large, reflected in divergent GDP growth forecasts for 2025: the IMF projects 1.5%, Investec sees around 2.0%, and PwC offers a range of 0.5% to 1.3%.

This points to modest growth ahead, which is a potential lifeline for SMEs. However, the path to recovery hinges on deeper rate cuts and sustained policy support to ease the credit squeeze and restore cash flow confidence, the white paper notes.

BUSINESS REPORT