New tax hikes expected for South Africa next week

South Africa will get a new budget this month without a VAT increase, but taxpayers should prepare for higher fuel and sin levies to make up for it.

After the postponement of the first budget in February and the withdrawal of the second budget by Finance Minister Enoch Godongwana last month, a new budget will be tabled on 21 May 2025.

The new budget is expected to have new projections, which include revenue, GDP growth and determining the appropriate amount of borrowing.

Despite tax revenues remaining constrained due to the economy’s weak growth, VAT and other significant tax hikes were heavily rejected by political parties and South Africans at large in the last budgets.

A widely criticised VAT hike of 2 percentage points was the downfall of the February budget, and the reduced 1 percentage point hike over two years ultimately led to the March budget’s withdrawal.

However, by cutting out these hikes, National Treasury is now sitting with a significant budget deficit, and will have combine spending cuts with other revenue sources to plug the gap.

Investec chief economist Annabel Bishop said that increasing taxes is not a favoured route to doing so, as this has a negative impact on growth and employment.

However, Godongwana may be left with no choice but to raise customs and excise taxes on things like tobacco and alcohol (ie, ‘sin taxes’), albeit moderately.

Sin taxes were already raised by higher than inflation in the previous budgets, so further increases will hit these sectors even harder.

Bishop also expects an increase in the fuel tax levy—something which was frozen in the February and March budgets as a way to soften the blow of the VAT hike.

With no VAT hike, the ‘relief’ for motorists by freezing fuel levies may no longer be applicable.

In addtion to these new tax measures on the cards, Bishop noted that the previous ‘stealth’ taxes on income are likely to remain.

This includes not adjusting tax brackets for inflation (ie, bracket creep) and not adjusting medical aid tax credits, which Treasury previously estimated would raise R19.5 billion in revenue.

The take from higher excise duties was estimated at an additional R1 billion, which may bring in slightly more if the taxes are raised further.

By hiking fuel levies, Treasury could raise a further R4 billion, previously earmarked as “relief”.

Outside of taxes, Bishop said it is unlikely for Godongwana to turn to debt, with the country already seeing a notable rise in borrowing projections.

2025/26 will likely see borrowing at 76.4% of GDP, 2026/27 at 76.1%, 2027/28 at 75.9% and 2028/29 at 75.3%. This is well ahead of the 60% level expected for emerging markets.

“Cutting expenditure is a prudent solution as South Africa is battling to fund its fiscal deficit and needs to consolidate its finances to improve fiscal sustainability and health,” said Bishop. 

SARS to get more money

While some fresh tax measures are certainly on the table, there are also expecatatons that tax collections will be projected higher.

This comes as National Treasury has already noted the need to bolster SARS’ capacity and increase the taxman’s funding so it can collect more.

Godongwna noted that SARS has detected over 150,000 taxpayers who are not registered or have not filed their taxes despite their substantial economic activity.

The taxman has also identified key demographics that are primed for SARS to target.

SARS reported tax revenue growth of 6.6% in 2024/25, with personal income tax the most significant revenue component at 12.6% due to strengthened compliance and a growing tax base.

SARS collection powers will need to be on full display this year, with little GDP growth expected.

The National Treasury is expected to reduce its GDP growth forecast from 1.9% for 2025. Most economists and finance groups see South Africa’s growth between 1.0% and 1.5%.

Investec revised its GDP projections from 1.8% at the start of the year to 1.3%. The Bloomberg consensus for GDP growth this year stands at 1.4%

The downward trajectory for growth is likely to account for a slight lift in gross debt-to-GDP ratios. Bishop noted that GDP growth of over 3.0% is needed for sustainable state finances.

With National Treasury indicating it is planning a conservative budget, financial markets and credit rating agencies should not have negative reactions.