Finance Minister pulls back on VAT hike; charts course for growth amid global uncertainty

SA’s Budget 3.0 update

By Tarryn-Leigh Solomons

Finance Minister Enoch Godongwana has tabled what he called a “redistributive and responsible” national budget, confirming that government has scrapped the controversial VAT increase initially proposed in March. Delivered to Parliament on Wednesday, 21 May 2025, Budget 3.0 balances the competing demands of fiscal consolidation, economic growth, and social support — while acknowledging the harsh economic realities facing South Africa and the world at large.

VAT U-Turn and the trade-offs

In a move that reflects government’s responsiveness to public and political pressure, the Minister announced that VAT will remain at 15%, putting to rest weeks of debate and speculation.

“This decision reflects our commitment to listen to South Africans, and to all the political parties represented in this House,” said Godongwana.

However, he acknowledged that the rollback comes at a cost: “Doing away with the VAT increase, without a viable alternative source of revenue, significantly reduced our ability to fund additional government programmes and projects.”

A budget for growth, not austerity

Despite tightening revenue projections — down by R61.9 billion over the next three years — Godongwana insisted this is “not an austerity budget.” Government will increase non-interest spending by 5.4% annually, translating to modest real growth of 0.8%. Crucially, 61 cents of every rand in non-interest spending will go towards the social wage. This includes basic services such as electricity, water, housing, education, healthcare, and social grants.

Over R1 trillion will also be invested in infrastructure to drive economic recovery and service delivery — a figure the Minister described as both ambitious and necessary.

The Global and Domestic Outlook

Global headwinds are weighing heavily on South Africa’s outlook. The IMF has revised its global growth forecast down to 2.8% for 2025, citing policy uncertainty and trade tensions. Global trade is also projected to slow sharply.

Domestically, South Africa’s real GDP growth forecast for 2025 has been cut to 1.4%, down from the 1.9% projected in March. Growth is expected to inch upward to 1.6% and 1.8% in 2026 and 2027 respectively, though risks remain.

“We must urgently turn the tide on our economic prospects and get our fiscal affairs in order,” said Godongwana. “Faster, inclusive growth that creates jobs is the only path towards a more prosperous South Africa.”

Fiscal strategy and debt

Government remains committed to macroeconomic stability. Debt is projected to stabilise at 77.4% of GDP by 2025/26, slightly above previous forecasts due to lower-than-expected nominal GDP. Still, the primary budget surplus is set to grow from 0.8% to 2.1% of GDP by 2027/28 — a key indicator of fiscal health.

But the cost of debt remains a major burden. “We are spending around R1.2 billion per day to service our debt — more than what we spend on frontline services such as health, the police and basic education,” warned the Minister.

Structural reforms and economic renewal

Godongwana recommitted to Operation Vulindlela, now entering its second phase, which focuses on energy, logistics, water, local governance, digital transformation, and spatial reform. The aim is to dismantle long-standing barriers to economic expansion.

“We must continue to implement growth-enhancing structural reforms to boost productivity and unlock private investment,” he said.

Revenue measures and SARS empowerment

The only new tax announced was a fuel levy increase of 16 cents per litre on petrol and 15 cents on diesel — effective 4 June. No new VAT or personal income tax increases were announced for the coming year.

To plug the revenue shortfall, an additional R7.5 billion will be allocated to SARS over the medium term. This will enable the agency to improve tax compliance, tackle illicit trade, and enhance digital infrastructure — potentially recovering R20 to R50 billion in owed revenue annually.

While Budget 3.0 maintains spending discipline and protects essential services, Godongwana warned that further tax proposals may be necessary in the 2026 Budget if revenue targets are not met.

Yet, he ended on a note of cautious optimism: “This undertaking is not insurmountable if we work together, stay focused, and persevere to chart a better course for our economy and our people.”

With global volatility rising and domestic headwinds persisting, the real test will be whether this budget can deliver on its promise of inclusive growth and economic renewal — without losing sight of the country’s most vulnerable.