By Nokwanda Mathenjwa

The Minister of Finance Mr Enoch Godongwana presented his budget on the 12th of March 2025, after it as was postponed from its initial date which was the 19th of February 2025, the first time in South Africa’s democratic history.

This was due to budget disagreements within the country’s second Government of National Unity (GNU). The GNU exists because South Africans exercised their voting rights to express their indignation and communicate their need for leaders that would advocate for their socioeconomic interests.

As such, it is commendable that parties responded in favour oftheir constituencies by opposing the presented budget, subsequently leading to Parliamentary budget vote. This was evidence of democracy at play, which also sets the precedence that lone cabinet decisions are a thing of the past.

The outcome of the Parliamentary Budget vote held and concluded on the 2nd of April 2025 was in support of the Ministry of Finance’s budget. The main variable of contention, which will now be effected is the 1% Value-Added Tax (VAT) hike over the next two years (0.5% each year), after 7 years of zero increases.

On the 1st of May 2025, which happens to be Worker’s Day, VAT will increase from 15%-15.5% and government will collect an additional 0.5% revenue from VAT eligible goods and services. This additional revenue, coupled with unchanged interests (11.5%) does not bode well for South Africa’s ailing economy.

The poor will get poorer due to higher food prices as theyspend a larger share of their income on basic goods. Though some basic food items are zero-rated, they will feel the pinch in other necessities including transport, airtime, data andelectricity costs.

According to Statista, in 2024, around 13.2 million people in South Africa were living in extreme poverty, meaning 139 563 more people were pushed into poverty compared to 2023.

An individual living in South Africa with less than 1 109 South African rand per month is considered poor, with individuals having R796 per month for food considered as living below the poverty line. Serving as a cushion, social grants were increased, the highest at R2 315 is for pensioners, war veterans, disability, and care dependency recipients.

As such the constituency will be the most impacted, because the increased social grants will inevitably be eroded by VAT induced inflationary pressures.

An Eighty20 2023 report identifies 4.1 million South Africans as middle class who are already financially stretched due to high debt-servicing costs which constitutes an average 66% of their salary. The VAT hike places additional pressures on their disposable income, which was not accompanied by personal tax relief and might not be accommodated by inflation-linked salary or wage increases.

As companies also face higher input and debt-servicing costs, which are usually be passed on to consumers, if not they are absorbed thus reducing profit margins. Suppliers and small business will experience the same, further reducing profit margins and corporate tax revenues, increasing the cost of doing business and further crippling small business battling to survive in an austerity-prone economic and operational environment.

Overall consumer and business spending declines, slowing down economic growth. It is prudent to note that South Africa introduced VAT in 1991 at a rate of 12%, replacing the General Sales Tax (GST) as a more efficient and broad-based form of indirect tax.

Theswitch to VAT aimed to simplify tax administration and broaden the tax base. According to the Gauteng Technical Advisory Center (GTAC) in 1993 it jumped to 14%, where it stayed for over two decades, as part of adjustments to improve revenue collection. The last increase was in 2018, rising from 14%-15%. The change was part of a broader effort to address South Africa's fiscal deficit and raise revenue.

2025 marked the 3rd VAT increase in 34 years and 7 years since 2018. The government has done well to reduce poverty from 71.1% in 1993 to 55.5% in 2020 and there is room for more.

Our tax base has shrunk over the years, the National Treasury reported the government grant recipient-to-tax payer ratios being 3.75-to-1. This translates to 7.9 million tax payers funding 28 million grant recipients.

South Africa desperately needs to broaden its tax base by growing the economy through job-rich growth that leads to significant job creation, reducing unemployment and improving livelihoods.

South Africans need to see more labour-intensive expansion plans which focus growth insectors that employ a high volume of workers (e.g. manufacturing, agriculture, construction,renewable energy, tourism, services).

The era of jobless growth must be buried, and replaced with a strong link between GDP growth and employment. Evident in a high employment elasticity of growth where a 1% increase in GDP leads to a proportional increase in jobs. A 2013 South African Reserve Bank Report (SARB) assumed current potential growth rates and a growth elasticity of employment of 0.3, would create 2.2 million jobs by 2025.

While a growth elasticity of employment of 0.7 will create 6.75 million jobs and lift the potential growth rate of the economy as more people are economically active. Implying that the higher the employment elasticity of growth the more jobs created.

The more South Africans employed, state dependency declines and as incomes increase the wider the tax base becomes across the different tax brackets, and the more revenue is generated from productive economic activity.

Supporting small business development by reducing the tedious red tape, improving the cost of doing business and leveraging the agility of innovative entrepreneurs to diversify the economy will contribute towards job creation and positioning high growth firms as taxable entities.

#eighty20

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