South Africa’s 22 cents disaster

For every rand spent by the South African government, 22 cents goes to paying off debt.

This cost is significantly higher than South Africa’s peer countries and contributes to high borrowing costs for households and businesses.

One of the bigger positives coming out of the 2025 Budget tabled earlier this month is that the National Treasury is, at the very least, working toward reducing this big debt cost.

Finance Minister Enoch Godongwana said it aims to stabilise government debt at 76.2% of GDP in 2025/26 while narrowing the budget deficit to 3.5% by 2027/28.

This means the debt-to-GDP ratio is expected to peak in the current fiscal year and drift lower thereafter.

It also means that the high and unsustainable debt service burden of 22 cents on every rand SARS collects going towards interest payments will stabilise and eventually decline.

However, this comes with the big catch that most South Africans are now well-aware of: the government needs more money.

Consultancy PwC has published its budget review, noting that the big 2025 budget controversy—a hike in VAT to 15.5%—is likely the least destructive way the National Treasury could accomplish this.

The group said the proposal would generate an extra R13.5 billion in tax revenues in the 2025 fiscal year and R43 billion over the next two years and would have the least detrimental effect on economic and employment growth over the medium term.

This is compared to the alternatives of raising Personal Income Tax (PIT) or Corporate Income Tax (CIT), which have historically had the opposite effect on collecting revenues.

PwC noted that South Africa’s PIT and CIT are relatively high compared to its peers whereas the VAT burden is relatively low.

“We estimate that, across upper-middle income countries, VAT rates average around 18%,” it said.

Since the 2008 global financial crisis, individual contributions of different taxes to South Africa’s tax mix have changed significantly.

The contribution of PIT has increased substantially, the contribution of CIT has decreased, while the contribution of VAT has remained relatively constant.

South Africa’s personal income tax burden is the largest single contributor to the tax mix and is equal to nearly 10% of GDP, PwC said.

This is the highest of any middle-income country and towards the high end for even high-income countries.

The group said this also makes it the most economically damaging tax to hike when looking for revenue.

“While South Africa has implemented substantial PIT increases in each of the five fiscal years until 2018/2019, these increases did not translate into the expected increased revenue collections,” the group said.

“Instead, these tax increases have had an adverse effect on levels of tax compliance and other behavioural responses.”

Alternatives to hiking taxes

PwC said there are alternatives to hiking taxes to recover from the 22 cents debt crisis.

The first alternative has been boosted in the revised budget through a R3.5 billion injection into the South African Revenue Service (SARS) to increase collections.

The consultancy estimated that South Africa has between R400 billion and R450 billion in ‘lost’ revenue collections in each.

If SARS could collect this, tax revenue would be 20% higher.

While it is unrealistic to expect 100% tax compliance, even collecting 10% of these ‘lost’ billions would add up to R45 billion to the budget, PwC said.

Another alternative to tax hikes would be reevaluating the South African Customs Union (SACU) revenue sharing.

The SACU agreement provides for duty-free trade between the member countries and the sharing of customs duties on imports of goods from the rest of the world, based on intra-SACU imports.

PwC noted that, in 2025/2026, the cost to South Africa of this deal in the form of revenues foregone relating to domestic consumption of dutiable goods is estimated at R73.5 billion.

“Clearly, these taxes could make a valuable contribution to the pressures faced by the South African fiscus, and it would be in the best interests of South Africa to negotiate a more equitable revenue-sharing formula,” PwC said.

The group added that Pretoria has been trying to renegotiate the agreement, including the revenue sharing formula, since 2011 with no success.

This is because the countries that form part of SACU are heavily reliant on the agreement as a revenue source.

Between 30% (Botswana) and 40% (Eswatini) of their government revenues come from this source, PwC said.

However, the current revenue sharing formula is not sustainable for South Africa’s fiscus.

“Perhaps it is time to consider (withdrawing) to encourage a revised SACU agreement and revenue-sharing formula which can be phased in over time to allow for adaptation,” the consultancy said.

Ultimately, the VAT hike appears to be the most immediate and ‘least bad’ answer to South Africa’s debt problem.

But PwC said that none of these painful options would be necessary if the economy was growing.

With the economy scraping by with a paltry 0.6% in 2024 and population growth exceeding 1.0%, the country’s real GDP per capita has been declining for the better part of a decade.

South African’s are getting poorer, and trying to tax the country into prosperity is not a solution.