With South Africa's political and economic landscapes intertwining more than ever, the looming debate over the value-added tax (VAT) increase has set the stage for tumultuous discussions among party leaders. The African National Congress (ANC) is contemplating leveraging support from the Economic Freedom Fighters (EFF) to secure the passage of their controversial budget, which proposes raising the VAT rate from 15% to 17%.
The Democratic Alliance (DA), the country’s second-largest political party, has come out strongly against this proposal, branding it “reckless” and potentially disastrous for South Africa’s economic framework. The budget presentation, which was scheduled for February 2025, faced delays as various political entities voiced their objections to Finance Minister Enoch Godongwana’s VAT hike plan.
Set to be presented on March 12, 2025, the revised budget contains the ANC's new proposal of raising VAT by only 0.75 percentage points, down from the initial 2% increase previously considered. Yet, the DA remains firm against any increase, pushing instead for strategic spending cuts to alleviate fiscal challenges.
Dr. Mark Burke, the DA’s spokesperson on finance, criticized the ANC’s strategy, asserting, “It’s a shame the ANC is willing to risk South Africa’s economic stability with such a tone-deaf VAT increase. We refuse to be held hostage by the ANC’s threats to involve the EFF.” He emphasized the DA’s stance on prioritizing government efficiency over tax increases.
President Cyril Ramaphosa has suggested backing the VAT increase as part of finding middle ground, advocating for increasing the rate by somewhere between 0.5 and 1 percentage point. The rationale presented aligns with insights from University of Cape Town professor Haroon Bhorat, who explains the proposed increase would be manageable due to the zero-rated goods basket aimed at shielding the most vulnerable citizens from heavy burdens.
While the DA continues its campaign against the VAT increase, the EFF is reportedly open to discussions on joining the governmental coalition if the DA opts out, complicting the already fragile political alliances within the country’s ruling government. The current climate suggests any budget decision has the potential to ripple significantly throughout South Africa's economic stability.
Bishop has warned about the potential downsides of the VAT increase, citing an article where Investec stated on March 3, 2025, she noted, “A 2% VAT increase could provoke inflation to spike close to 1%, creating systemic economic challenges.” This situation is flagging potential interest rate hikes if inflation is not vigilantly managed, with analysts forecasting room for up to 50 basis points of interest rate cuts by the end of 2025 contingent on VAT decisions.
With inflation already predicted to hover around 3.5% annually for 2025, economists fear increased VAT could also mean moving away from the mid-target inflation rate of 4.5%, hobbling the potential for immediate interest rate cuts and impacting the consumer market negatively.
Looking back historically, prior VAT increases have shown notable effects; when VAT was raised to 15% back in April 2018, it had lasting impacts on the economy, as inflation rates surged by approximately 0.6% year-on-year, which indirectly influenced GDP growth negatively by roughly 0.2% between mid-2018 and mid-2019.
It’s clear—higher prices due to tax increases result in dampened consumer demand, which can reverberate through the economy by hampering overall growth. The ANC’s consideration of reaching out to the EFF signals underlying tensions about securing stable governance moving forward.
While the ANC contemplates its next steps, Finance Minister Godongwana has downplayed the likelihood of significant changes to the inflation target, which currently stands above 2%. Any adjustments here could present yet another conundrum for political leaders balancing immediate fiscal needs against long-term economic growth.
Leading up to the budget's presentation, the questions linger: How will the ANC navigate the deep political waters of securing necessary votes? And will they be able to maintain economic stability amid uncertain tax adjustments?
With South Africans watching closely, the upcoming budget presentation is scheduled to be pivotal. The political wrangling now leaves stakeholders questioning whether the ANC can effectively handle both the short-term needs and long-term stability of the economy without sacrificing public confidence.