In a bold but controversial move to stabilise South Africa’s precarious fiscal situation, the National Treasury has proposed a VAT increase by 0.5% in 2025/2026, and a further 0.5% in 2026/2027 - raising the VAT rate from 15% to 16%.

The move comes as the government grapples with a widening budget deficit, mounting debt servicing costs, and pressure to sustain essential services like social grants, public sector wages, and infrastructure development.

Finance Minister Enoch Godongwana tabled the national budget last month, saying that the VAT hike is a necessary measure to generate additional revenue and prevent the country’s fiscal situation from spiraling into unsustainability.

Treasury officials argue that with limited alternatives - such as raising already high personal income and company tax rates - VAT hike is the only option to resolve the issue.

But for ordinary South Africans, the increase in consumption tax feels like another blow to already strained finances.

Speaking with IOL News, Dr. Johann Frederich Kirsten, senior lecturer at the University of Johannesburg’s School of Economics, said the attempt to soften the blow by phasing the increase over two years offers little comfort.

“At the end of the day, a 1% increase (staggered or not) still hits households hard,” Kirsten said. “Consumers are already stretched by high living costs, limited job availability, and rising debt levels.”

He said that even a small VAT hike disproportionately affects the poor and middle class, especially those in the so-called “missing middle” - too rich to qualify for government aid, but too poor to cope with rising costs.

“Most of the goods they buy aren’t zero-rated, so they’ll feel the full impact of a VAT increase.”

Many economists argue that raising VAT during a period when consumer spending is needed to drive economic growth is risky.

“South Africa’s economy desperately needs a boost in consumer activity,” Kirsten said.

“This measure risks doing the opposite.”

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Watch VideoTreasury vs households: The fairness of South Africa's proposed VAT increase

Treasury vs households: The fairness of South Africa's proposed VAT increase