Basic income grant closer to reality for South Africa

The government’s contentious plan to increase value-added tax (VAT) may be an early sign of how the state intends to fund a Basic Income Grant (BIG) or the National Health Insurance (NHI).

Last week, the 2025 Budget was postponed. The unprecedented move came after disagreements within the Government of National Unity (GNU) over the highly contentious move to increase VAT.

Finance Minister Enoch Godongwana was set to announce a two-percentage-point increase in VAT to 17%, which would be partly offset by an increase in the VAT zero-rated list.

The Bureau for Economic Research (BER) said that the VAT increase would have stabilised the debt ratio this year.

Although the increase would have also shifted more funds towards infrastructure investment and protecting frontline services and the poor, it would have come at a huge cost to the taxpayer.

National Treasury said that the VAT increase, which would have taken effect on 1 April 2025, was “unavoidable” to ensure adequate funding for policy priorities while maintaining fiscal sustainability.

“Our suspicion has always been that a VAT hike would potentially be used to fund a Basic Income Grant (BIG) or the rollout of National Health Insurance (NHI),” said the BER.

Even if the aborted budget was eventually passed, the tax wiggle room available to Treasury would have been all used up.

The BER also noted that there was still nothing new in the budget to permanently fund the Social Relief of Distress (SRD) grant as the basis of sustainable basic income support.

A BIG was once again promised by President Cyril Ramaphosa in his State of the Nation Address only a few weeks earlier.

Where the money is going

Of the added R173.3 billion in new money to the 2024 Budget baseline over the next three years, R75.6 million would have gone into frontline services, such as education and healthcare.

The second largest share of R58.5 billion would have allowed for above-inflation increases in social grants, which would help offset the impact of the VAT hike on the poor.

The R58.5 billion would also include the SRD grant for another year. However, the allocation of R35.2 billion for the SRD grant comes into conflict with a recent court order.

A recent High Court ruling said that fiscal constraints were not a sufficient excuse to exclude people who cannot support themselves.

This ruling would see the number of grant recipients increase from about 10 million to 18 million. The benefit remaining pegged at only R370 per month has also been rejected by the courts.

Both features are subject to an appeal by the government but could see grant expenditure on grants skyrocket if the appeal process is unsuccessful.

After grants, the next largest expenditure from the new money would have been from infrastructure, driven by more expenditure on water and transportation projects, totalling R46.7 billion.

There was also a new three-year public sector wage agreement, which would have granted an above-budget 5.5% increase in the first year and held increases to CPI in the two outer years.

The wage increase would have been absorbed by R23.4 billion of new money. The rest of the money would have been used for roads, the early retirement of government workers and other projects.

National Treasury acknowledged that the VAT increase would likely dampen consumer spending and weaken economic growth.

However, the Budget Review noted that studies show that increasing VAT will have the least detrimental effect on economic growth and employment compared to increases in personal or corporate income tax.

“From a practical perspective, the discussion among GNU parties and Treasury will thus likely turn into one about trade-offs,” said the BER.

“If they are adamant about not raising VAT, there is no money for the ‘new’ expenditures—so what will they be willing to forfeit, or where else could the money be found?”

“It is also important to highlight that the Treasury’s assumptions about the revenue that the VAT hike could bring in are, in our view, optimistic.”