Parliamentary budget office rejects VAT hike

The Parliamentary Budget Office (PBO) has slammed the National Treasury’s plan to increase value-added tax (VAT), labelling the proposal as regressive and tone-deaf in South Africa’s current economic climate. 

At the beginning of April, the government of national unity (GNU) passed the fiscal framework through the National Assembly with a narrow majority.

Parliament voted 194 to 182 to adopt the 2025 fiscal framework report, which the Standing Committee on Finance had approved without any amendments earlier this week.

The report’s adoption is the first of several steps in implementing the controversial 2025 budget, with the tabling of the Tax Amendment Bill to follow.

Contrary to political parties’ claims that the VAT hike had been removed or ended, Finance Minister Enoch Godongwana has confirmed that it remains part of the budget.

The VAT rate is expected to increase to 15.5% on 1 May 2025 and to 16% on 1 April 2026.

However, on Wednesday (9 April), the PBO slammed the VAT increase in its assessment of the Treasury’s budgetary proposals. 

The PBO is a unit within Parliament established to provide independent and expert analysis of the nation’s budget and fiscal policies. 

It supports Parliament’s fiscal oversight role by offering unbiased, evidence-based research and analysis on socio-economic conditions, the impact of fiscal choices, and the broader economic landscape. 

The PBO painted a picture of an economy in regression and pointed out that since fiscal framework measures began in 2012, SA’s annual official unemployment rate rose from 24.9% to 32% last year. 

“The youth unemployment rate, often described as a ‘ticking time bomb’ in SA due to its obscenely high rates, remained above the national average at 45.6% in 2024,” said the PBO. 

“The National Treasury justifies the VAT increase by comparing the country’s rate to countries with higher VAT, yet unemployment in these comparator countries ranges from 3% to 13.4% in 2024.”.

“Though the intervention in spending in the public employment programmes is a step in the right direction, it is unlikely to significantly affect the millions of unemployed people, many of whom have been without jobs for a year or longer.”

Blow to middle- and lower-income households

The National Treasury plans to shield vulnerable households from the proposed VAT increases through above-inflation social grant adjustments, expanding the list of zero-rated food items, and not increasing the fuel levy.

However, the PBO argues that these measures alone do not sufficiently protect vulnerable households from the broader inflationary effects of a VAT increase.

The Competition Commission’s 2024 Essential Food Pricing Monitoring Report indicated that retail prices of essential foods remained persistently high despite lower producer costs and fuel prices. 

This suggests that retailers undermine protective measures by not passing savings to consumers.

“An increased VAT will disproportionately burden middle- and low-income earners, who typically spend over 68% of their income on essential items such as food, water, electricity, and housing,” said the PBO. 

Additionally, in its argument supporting the VAT increase, the Treasury noted that South Africa’s VAT rate is relatively low compared to ‘peer’ countries.

The PBO pointed out that while this is true, it ignores the extreme wealth and income inequality present within the country.

“In South Africa, the bottom 50% of the population holds negative wealth (they owe more than they own), while the top 10% owns over 85% of the total wealth,” said the PBO.

“By contrast, the wealth and income distribution in these ‘peer’ countries is less concentrated in the hands of the top 10%.” 

As a result, the PBO argued that populations in these countries are less exposed to the regressive impacts of higher indirect taxes because their wealth and income are distributed more equitably.

“The proposed regressive revenue-raising measures are likely to disproportionately burden poor and low-income households—deepening the country’s inequality ratios,” the PBO added.