BUDGET 2025 | Postponed budget floated VAT increase, more foodstuffs to be zero-rated

In a budget that was drafted but never tabled, finance minister Enoch Godongwana proposed a hit to consumers' pockets, raising VAT from 15% to 17%, effective from April 1.

The budget documents, which were not tabled but have been seen by reporters and economists. Cabinet filed to approve the budget ahead of the scheduled tabling over the VAT hike proposal.

Godongwana made the stunning announcement in parliament on Wednesday when he tabled his 2025/2026 budget.

The last time the government raised VAT was in 2018 when it hiked it from 14% to 15%. Faced with plummeting tax revenue as the economy continues to underperform, Godongwana has made the move to raise an additional R58bn in revenue in 2025/2026.

The additional funds were to be used for the extension of early childhood development coverage and hiring more teachers, doctors and other frontline personnel in the public service.

Several provinces such as the Western Cape and KwaZulu-Natal have being losing critical teaching staff due to previous budget cuts, with Godongwana warning 19,000 teaching posts were under pressure in KZN due to the funding crunch.

In his budget documents, Godongwana said “the difficult decision” to raise VAT was taken after “carefully considering potential contribution” of all the main tax instruments such as personal income tax and corporate income tax, which he did not increase.

The documents also showed the National Treasury believed a hike in VAT would impact more on higher-income households than on lower-income and poor households.

“VAT is a tax on consumption. A rate increase affects all households through price increases, but most VAT is paid by higher-income households which consume more.

“More than 75% of VAT revenue is derived from households in the top four expenditure deciles, which roughly corresponds to households that spend R118,000 per year.

“Increasing taxes on consumption through higher VAT rate will have the least detrimental effect on economic growth and employment over the medium-term, relative to increases in personal and corporate income tax.”

As a measure to cushion the poor from the effects of the hiked VAT, Godongwana has expanded the number of basic food items in the zero-rated food basket. These will include a range of protein or meat products from sheep to poultry, goats, pork and beef, liquid dairy blends, tinned and bottled vegetables.

This will see government forego R2bn in revenue.

SA Reserve Bank governor Lesetja Kganyago, who was among those with Godongwana at a closed pre-budget briefing in Cape Town on Wednesday, said the raised VAT came as “shock”.

He was concerned it could result in increased prices of goods and services and might have inflationary pressures.

“We treat a VAT increase as a shock in the forecast, it was not expected,” said Kganyago. “Like any other shock, you do not respond to the shock. You wait to see if there are any [aftershocks].”

The finance minister has also radically raised “sin” taxes, hiking the prices of alcoholic beverages and tobacco products by more than double the inflation rate, at 6.3%.

A 750ml bottle of spirits goes up by just more that R6.40 while a packet of 20 cigarettes will cost R1.05 more. A 340ml can of beer or a cider will become 16c more expensive with a bottle of sparkling wine costing 91c more.

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