South Africa is facing new economic challenges as the government considers an increase in the Value Added Tax (VAT), particularly affecting low-income households. Finance Minister Enoch Godongwana announced in the 2025 Budget Speech the proposed increment of VAT by 0.5 percentage points in both 2025/26 and 2026/27, bringing the rate to 16% by 2026/27. This potential hike has raised alarms among citizens already grappling with rising costs of living.
The expected VAT increase could affect nearly all goods and services aside from a few zero-rated items. Recent analysis from the Pietermaritzburg Economic Justice and Dignity Group (PMBEJD) posits that a household's basic grocery basket might witness a jump of approximately R375.16, making the total grocery cost reach R5,477.84. Essential toiletries and household products may also witness price escalations, further burdening many families.
Various observers have warned that this VAT hike will disproportionately impact lower-income households, which already dedicate a significant portion of their budget to essentials such as food and electricity. In addition, with the ongoing electricity price hikes forecasted at about 12.7%, the mounting financial strain on households is becoming untenable for many South African families.
With these alarming shifts in economic dynamics, small businesses are also poised to feel the adverse effects of operational cost increases. Consequently, many may face challenges in staying competitive, leading to job losses and potential economic downturn.
Despite the expected hurdles caused by the VAT hike, certain staple food items remain exempt from VAT. This category includes brown bread, maize meal, rice, vegetables, and a selection of others that are designed to mitigate the impact for lower-income households. As of May 1, 2025, additional food items will be included in the zero-rated VAT exemption list, such as edible offal and various canned goods.
Economic experts argue against the efficiency of employing VAT increases to tackle South Africa's fiscal issues, recommending alternative revenue sources that do not further exacerbate economic hardships, especially for impoverished communities already on the brink of distress.
Following a tumultuous budget announcement that even led to a delay in the budget speech itself on February 19 due to disagreements on VAT increases, the national economic outlook remains uncertain. As the government underscores the necessity of boosting revenue to address their pressing budget deficit, observers worry that the proposed VAT adjustments will make daily living even less affordable.
The South African tax system is notably one of the most burdensome in the world, alongside concerns about high personal income taxes and a tax system that equates to nearly 25% of the nation's gross domestic product. These financial strains may not only hinder investment and growth but also push households deeper into poverty.
The recent economic turbulence exacerbates existing conditions with unemployment and stagnating economic growth rendering the financial outlook increasingly bleak. To address these challenges effectively, analysts advocate for strategies that prioritize job creation and stimulate economic growth to restore confidence and stability among the population.
It remains to be seen how the government will respond to growing public dissent and opposition regarding the proposed VAT hike. If enacted, consistent increases in VAT, alongside rising living costs, could precipitate a significant reduction in consumer spending — further entrenching the economic malaise in South Africa.
With discussions ongoing and futures uncertain, South Africans are urged to be proactive in managing their budgets, leveraging VAT-free food options while confronting the imminent changes in financial landscapes.
