Godongwana reveals the budget item causing VAT hike chaos in South Africa

Finance Minister Enoch Godongwana is sticking to his guns on hiking the county’s VAT rate to raise revenue, saying that it is necessary to keep the Social Relief of Distress (SRD) going.

If he were allowed to cut the SRD grant from the budget, the VAT hike wouldn’t be necessary, he told the Sunday Times.

““If you allowed me to cut the SRD, I wouldn’t increase anything. I’m faced with increased expenditures which are not in the budget,” he said.

Godongwana said that the SRD grant was always understood to be a temporary measure, and he has repeatedly warned that if the government insists that it stays on the books, a revenue source would have to be found to fund it.

As President Cyril Ramaphosa has now effectively decided that the grant should be the basis for a basic income grant, the finance minister has no choice but to find the money for it.

The SRD grant was introduced during the Covid-19 pandemic to provide some relief to those who had no work and received no other grants from the state.

Over the years, the means test for the grant has been restricted, leading to between 9 and 10 million recipients, costing around R36 billion a year.

In the shelved 2025 budget, R35.2 billion was dedicated to the grant, which has also increased in value from its original R350 to R370 in 2024.

The government’s dedication and push for the grant to become a permanent fixture was also thrown a curveball ahead of the budget speech when the High Court ruled it did not go far enough.

The court found the means test too restrictive and the value of the grant too low.

It ruled that fiscal constraints were not a sufficient excuse to exclude people who cannot support themselves and that the fixed value of the grant each year was also rejected.

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

This ruling would see the number of grant recipients increase from about 10 million to 18 million, and the cost to the taxpayer shoot up in proportion.

In 2024, Treausry crunched the numbers for parliament, noting that while the current grant costs around R40 billion per annum, this could very quickly rise to R171 billion by 2032/33 if the grant becomes permanent, uptake increases, and value approaches the food poverty line.

If the grant were pushed to reach a ‘universal’ level of 35 million people between 18 and 60 years old, this could carry a cost of R400 billion per year – something Treasury has completely ruled out as unaffordable.

Free is never free

The ANC’s promise of a basic income grant compounds the party’s other big promises that it has now run out of money to afford.

This includes free comprehensive universal healthcare through the National Health Insurance (NHI), which is also set to drain the fiscus as the National Department of Health pushes ahead with its rollout.

Just to fund the SRD grant as it stands – not even considering the high court ruling – Godongwana said a VAT hike is necessary.

The original plan to hike VAT by two percentage points to 17% would have raised an additional R60 billion in 2025. This would have also allowed the National Treasury to budget more for education and health.

Other tax hikes would be necessary in lieu of a VAT hike, adding more pressure on an already highly overtaxed base.

However, partners in the Government of National Unity (GNU), the Democratic Alliance (DA) in particular, outright rejected this.

Reports have pointed to cabinet now approving a much smaller VAT hike – of only 0.5 percentage points – but the country could see similar hikes over the next three years, hitting the 2%pt mark eventually.

According to the Sunday Times, the DA has been non-commital to this plan. If the DA does not vote in support of the budget, the ANC may be left with no option but to seek support outside the GNU.

The party has already floated the idea of turning to the EFF for support. The party is reportedly consulting widely to get this done.

The new budget will be presented in the coming week, on Wednesday, 12 March.