Finance Minister Enoch Godongwana wants R300 billion more from South African taxpayers

Finance Minister Enoch Godongwana is expected to squeeze billions more out of South African taxpayers to fund the government’s large budget shortfall.

Godongwana will deliver his 2025 Budget Speech in the National Assembly on Wednesday, 19 February, at the Nieuwmeester parking site within the parliamentary precinct.

The finance minister uses his Budget Speech to indicate the allocation of financial resources to the national government’s priorities.

Godongwana will outline all the financial, economic, and social commitments the government will prioritise in its planned expenditure.

He faces numerous challenges, including a turbulent economic landscape, currency volatility, global trade tensions, and a big budget deficit.

Investec Chief Economist Annabel Bishop expects to see similar fiscal ratio projections to the 2024 Medium Term Budget Policy Statement (MTBPS).

“Gross loan debt was revised up for the current fiscal year and over the projection period, with the same case for the budget deficit,” she said.

She said fiscal slippage has become a general trend in South Africa, and in most cases, the fiscal metrics deteriorate.

South Africa’s latest debt to gross domestic product (GDP) was projected to peak at 75.5% in 2025/26.

This is well above the debt-to-GDP ratio of 60%, seen as the maximum sustainable debt ratio for an emerging market economy.

Bishop warned that there is a risk of widening the debt ratios. The revenue to date is similar to last year. Both years see a budget deficit of R258 billion to date,” she said.

She explained that lower nominal GDP would increase the gross loan debt and deficit to GDP projections. 

Bishop added that South Africa’s budget deficit was revised weaker, to -5.0% of GDP for this year from -4.5% of GDP.

“The state’s ongoing heavy expenditures in the face of insufficient revenue create an ongoing fiscal deficit, and so borrowings have not peaked,” she said.

“Markets are wary, as state spending pressures continue to press on finances. With weaker economic growth and lower inflation than forecast, fiscal slippage is expected,” she said.

Finance Minister Enoch Godongwana squeezing taxpayers

The significant budget deficit and South Africa’s rapidly rising debt-to-GDP put pressure on the Finance Minister to find additional money.

Most economists agree that cutting state spending is the real solution to the problem. However, it is politically unpalatable.

The Sunday Times reported that the government plans to “squeeze more out of taxpayers to fund a projected R300 billion shortfall”.

It said they discussed possible tax increases to cover the revenue shortfall. It can impact numerous taxes, including VAT, personal income tax, and corporate taxes.

However, this poses challenges. South Africans are already overtaxed, and increasing taxes further could cause tax revenues to fall.

Economist Dawie Roodt previously warned that there is no room to increase taxes as rich people and companies will leave the country if it happens.

Another problem is that higher taxes result in lower compliance, which also causes tax revenue to decline.

One option is to leave personal income tax brackets unchanged, which cause taxpayers to pay more due to bracket creep.

Bracket creep is where inflation and salary increases pushes some taxpayers into higher tax brackets, making them pay more tax.

Another option is for the government to increase value-added tax (VAT). However, it is politically sensitive as it affects poorer South Africans.

“It took considerable pressure to raise VAT to 15% in 2018, and even the current fiscal pressures are unlikely to motivate another VAT raise,” Ania Strydom from PaySpace said.

There is also speculation about targeting medical aid tax credits to fund the NHI. In the 2025 Budget, we might see initial steps in this direction,” Strydom said.

Another option is a wealth tax. However, this carries enormous risks as rich individuals are mobile and can easily migrate their wealth.

Citadel chief economist Maarten Ackerman said that significant tax hikes are unlikely given South Africa’s already high tax burden.

However, the government may explore alternative revenue measures, such as adjusting VAT structures or revising tax policies affecting high-net-worth individuals.

Ackerman highlights that this might include changes around Regulation 28, capital gains tax, and dividend tax.

VAT change debate

Experts and politicians remain divided on the possible VAT change ahead of the Budget Speech later this week.

Many expect an expansion for the zero-rated item list, promised by President Cyril Ramaphosa and others in 2024.

Zero-rated goods are products exempt from VAT. They currently include 19 basic food items, farming inputs, and residential rental accommodation.

The food products currently exempt from VAT include brown bread, maize meal, samp, mealie rice, dried mealies, dried beans, lentils, and pilchards in tins.

It also includes milk powder, dairy powder blend, rice, vegetables, fruit, vegetable oil, milk, cultured milk, brown wheaten meal, eggs, and edible legumes.

At a media roundtable, Deloitte experts said zero-rating can offer long-term relief for distressed South African households.

They added that it was unlikely that VAT would be increased in the 2025 Budget as an increase would disproportionately affect the poorest in South Africa.

They added that once items are added to the zero-rated list, it is doubtful that they will be removed in the future.

However, there are still question marks over what items would be added to the zero-rated list, as it is a complicated process.

Deputy Minister of Finance David Masondo previously said that a serious change in the zero-rated list is unlikely.

Masondo said that existing items on the list are well-targeted. He added that increasing the zero-rating list will lead to VAT revenue loss.

Not only will this add further strain to an already troubled budget, but it could also be directed to the already existing pro-poor government programmes.