Finance Minister Enoch Godongwana tabled his delayed Budget on Wednesday that included lower, yet still controversial, increases to the value added tax (VAT) rate, as he sought to hold the fiscal-consolidation line amid rising spending pressures.

The new proposal involves increasing the VAT rate by 0.5 percentage points in 2025/26 to 15.5% and by 0.5 percentage points in 2026/27 to 16%, rather than the immediate two percentage point hike to 17% proposed in the aborted Budget of February 19.

The increases have been coupled to other tax adjustments to help close the revenue shortfall, as well as drawdowns against the contingency reserve that are higher than those outlined in the aborted February 19 Budget.

The other tax measures included no inflationary adjustment to personal income tax (PIT) brackets, rebates and medical tax credits, as well as above-inflation increases in excise duties on alcohol and tobacco products.

These tax proposals would raise R28-billion in additional revenue in 2025/26, R44-billion next year and R46-billion in 2027/28, with the VAT increases expected to contribute R13.5-billion this year, and R19.8-billion and R31.5-billion respectively in the two outer years.

This would be partially offset by about R2-billion yearly as a result of an increase in the basket of zero-rated items, which will be implemented in an effort to mitigate the impact on poor households.

The decision not to make inflationary adjustments to PIT brackets and medical aid tax credits, meanwhile, would yield R19.5-billion in 2025/26 and would have a carry-through effect of R20.6-billion and R21.9-billion in the two outer years.

The above-inflation increases in excise duties on alcohol and tobacco products would yield more than R1-billion a year in additional revenue, but indirect taxes would be decreased over the period by more than R4-billion yearly as a result of a decision not to increase the general fuel levy.

Overall, gross tax revenue would increase from R1.98-trillion to above R2-trillion in 2025/26 as a result of the tax measures announced. In addition, the National Treasury revised the expected tax revenue shortfall for 2024/25 to R16.7-billion from the R19-billion signalled previously.

Nevertheless, the R28-billion additional revenue now forecast falls well short of R58-billion that would have been raised by Godongwana’s initial proposal to hike the VAT rate to 17%.

DA REJECTS BUDGET

That proposal seriously divided the Government of National Unity (GNU) Cabinet, however, precipitating the unprecedented decision to postpone its tabling from February 19 to March 12.

The revised and lowered VAT hike remains unpopular, and it became apparent ahead of its tabling that it would still be opposed even by members of the GNU, while some non-GNU parties and civil society groups have indicated that they could pursue protest action.

The Democratic Alliance (DA), a key GNU member that had strongly opposed the initial VAT hike proposal, still opposes the Budget in its current form.

In a statement, the DA said its rejection arose because the African National Congress (ANC) had refused to accept the DA’s conditions for supporting the Budget, which would be premised on any tax increases being temporary and that they be coupled to major reforms.

“The ANC VAT Budget doesn’t have a majority, and the DA won’t give it one,” the DA said in a statement.

However, DA leader John Steenhuisen had left the door open for reaching an agreement before Parliament voted on the Budget.

In an earlier media briefing Godongwana indicated that the DA might agree to the two 0.5 percentage-points hikes, with conditions, but noted that not all of these related directly to the Budget process.

There is also growing pressure on government to introduce savings, but the National Treasury said it was difficult for the size and permanency of possible savings to be immediately quantified and implemented.

SPENDING REVIEW

However, 240 spending reviews had been undertaken by the National Treasury and provincial treasuries since 2013 to examine cuts and improve spending efficiency.

These would now be elevated to the level of Cabinet in the coming month with the aim of finding ways of ensuring their implementation.

"The consolidated recommendations of these reviews will be taken to Cabinet in the next month.

“The President has also undertaken to establish a committee between the Presidency and Treasury to identify waste, inefficient and underperforming programmes," Godongwana announced.

Actions would be taken immediately to audit ghost workers, starting with national and provincial departments, and to use the ongoing review of labour market activation to reduce duplication and improve operational efficiencies across the more than 100 active labour market programmes in over 20 public institutions.

"The Treasury will implement significant changes to the Budget process by reassessing the initial assumptions informing Budget allocations, with a view to creating room for improved spending," the Minister added.

The National Treasury said the decision to turn to hiking VAT rather than personal or company taxes was made because increasing those direct taxes would have been more negative for employment, savings, investment and growth than a VAT increase.

South Africa, it said, already had a high contribution of company taxes to total revenue, while the country’s VAT was relatively low compared to various peer countries. The basket of zero-rated items would also be expanded to include canned vegetables, edible offals of sheep, poultry and other animals, and dairy liquid blends.

However, the tax adjustments announced by Godongwana were also insufficient to match the new spending pressures, which cumulatively came in a R232.6-billion over the three years, R102-billion of which was allocated to the 2025/26 financial year.

These pressures are broad-based, but some of the larger items earmarked for 2025/26 included: an additional R35-billion to extend the Covid-19 social relief of distress grant in line with a recent court judgment; R22-million for additional frontline services, including the expansion of early childhood development programmes and the employment of additional doctors; R8.6-billion to cover the South African National Roads Agency’s debt in relation to the Gauteng freeways; and R14-billion for various infrastructure initiatives.

The Budget Review states that these spending additions will be partially offset by drawdowns on provisional allocations and contingency reserves, of R66.7-billion and a R21.3-billion respectively over the coming three years. In the initial proposal, the drawdown of contingency reserves was expected to be R9.9-billion over the period.

No provision had yet been made for the withdrawal by the US government of its yearly support of about R8-billion for South Africa’s initiatives to combat HIV/Aids.

The Department of Health had commissioned an audit of these aid flows, much of which went directly to nongovernmental organisations, and Godongwana was expecting feedback before the end of March.

Traditionally, government has drawn on its contingency reserves to close unexpected expenditure gaps, such as that which could arise from America’s withdrawal of aid.

However, National Treasury director-general Duncan Pieterse said that the fiscal buffers in place to ensure that government was in a position to respond to unexpected and unforeseen expenditure was weaker under the fiscal framework tabled on March 12 than was the case under the February 19 framework.

GROWTH OVERSHADOWED

The package announced is aimed at ensuring that public debt peaks in 2025/26 at 76.2%, slightly higher than the 76.1% initially planned, of GDP and declines to 75.9% and 75.1% in the two outer years.

Likewise, debt-service costs, which consume 22c of every rand of revenue, will stabilise at 21.7% of revenue under the Budget framework outlined.

The consolidated budget deficit is still expected to rise to 5% of GDP in 2024/25, before falling to 4.6% in 2025/26, and to 3.8% and 3.5% in the two subsequent fiscal years.

Government’s difficult fiscal position continued to overshadow the growth agenda set out by President Cyril Ramaphosa in his February State of the Nation Address, where he announced a 3% growth target.

While forecasting lower-than-expected growth of only 0.8% for 2024, the Budget Review expects the economy to expand by only 1.9% in 2025, 1.7% in 2026 and 1.9% in 2027.

FISCAL RULE?

Meanwhile, the National Treasury released a a discussion document for public comment on the highly contested proposal of the introduction of a fiscal rule or anchors for fiscal sustainability.

While it has been reported  that the GNU has rejected a formal fiscal rule, the discussion document released during the tabling of the Budget outlines the various anchors that could be considered.

These ranged from a numerical fiscal rule that set binding limits on debt and deficit levels, to integrating fiscal sustainability principles into the process of tabling and voting on budgets.