VAT Hike: The easy target that hits the poor hardest
Budget Expectations
National Treasury indicated that the performance of Sars would be monitored by assessing the change in the amount of cash collected from debt and that, if successful, the R20bn in tax increases would be reconsidered.
Image: Ziphozonke Lushaba / Independent Newspapers
IN A significant admission regarding the state of South Africa’s fiscus, new predictions reveal that while a Value-added Tax (VAT) increase remains the most effective tool for revenue generation, political toxicity has forced National Treasury to keep it off the table for Budget 2026.
According to an analysis by PwC, "Driving reform for growth in Budget 2026/27, the government is walking a tightrope between technical necessity and political survival.” Despite intense pressure to close funding gaps, the analysis states unequivocally: “Following the controversy over the proposed VAT rate changes last year, we do not anticipate any significant VAT changes.”
The reasoning highlights a stark conflict between policy efficiency and political reality. The document notes: “In the event that National Treasury does proceed with tax increases for 2026/27, it is not expected that this will be done in the form of a VAT increase given the resistance to this across the political spectrum and notwithstanding that this would, from a technical policy perspective, be the best way to raise significant additional revenues.”
Instead of a rate hike, the focus shifts to enforcement. “However, we envisage that the budget will announce broad administrative refinements aimed at strengthening the overall functioning of the VAT system, including measures that enhance compliance, close loopholes, and streamline processes as the SA Revenue Service (Sars) continues to lay the groundwork for VAT modernisation.”
The avoidance of a VAT hike comes amid uncertainty over previously pencilled-in tax increases. “Budget 2025 saw R20bn of unspecified tax increases pencilled in for 2026/27 in the final approved iteration of the budget.”
Initially, relief was tied to Sars performance. “National Treasury indicated that the performance of Sars would be monitored by assessing the change in the amount of cash collected from debt and that, if successful, the R20bn in tax increases would be reconsidered.”
While collections have been strong, with revenue “8.6% higher than for the same period in 2024/2025”, the path remains murky. “Although Sars appears to be some way off collecting an additional R20bn in 2025/26… National Treasury appears to have softened its approach recently, instead seeming to consider whether an additional R20bn is collected over the Budget 2025 forecast, whether from debt or elsewhere.”
PwC predicts: “In light of the expected revenue collections for 2025/26, we do not expect that National Treasury will proceed with those increases.” The decision to avoid VAT occurs against a backdrop of elevated debt. “South Africa’s debt burden remains elevated at 77.9% of GDP.”
Fiscal consolidation remains critical. “Our wish is for the National Treasury to maintain its commitment to fiscal consolidation and provide a credible path to primary surpluses that can stabilise and ultimately reduce the debt ratio.”
The budget balance forecasts remain in deficit:
- 2025/2026: -4.9%
- 2026/2027: -4.1%
- 2027/2028: -3.7%
- 2028/2029: -3.3%
PwC warns, "The primary budget surplus achieved in 2023/24, the first in 15 years, is expected to widen from 0.9% of GDP in FY2025/26 to 2.5% by FY2028/29." Execution risk remains high. “However, execution risk remains, particularly if growth disappoints or contingent liabilities materialise.”
External threats loom large. “The 30% US tariff on South African exports and uncertainty around AGOA represent significant risks to growth and the external balance.”
The document details the severity: “The Trump administration imposed a punitive 30% tariff on South African goods in August 2025, the highest in sub-Saharan Africa, affecting about $3.6bn in exports annually, particularly vehicles, citrus, wine, and agricultural products.”
The human cost is stark: “An estimated 100 000 jobs are at risk across agriculture and automotive sectors.”
Compounding the tariff shock is a crisis in health funding. “The termination of USAID-funded health projects creates a significant gap in HIV, TB, and primary healthcare delivery.”
Specifically: “The USAID funding termination(affecting approximately 40 health projects and 8 500 PEPFAR-funded staff) creates a funding gap that will require fiscal accommodation or domestic resource mobilisation.”
The implications are dire: “Without intervention, modelling suggests 500,000+ additional HIV-related deaths and 565 000 new infections could occur by 2035.”
Social grants also strain the budget. “The SRD grant extension to 2027 adds approximately R36-38bn annually to baseline expenditure.” PwC calls: “National Treasury provides: A clear timeline for finalising proposals on sustainable income support. Transparent costing of various policy options. Clarity on funding sources.”
While VAT is stagnant, other tax burdens are under scrutiny. Regarding Personal Income Tax (PIT), “South Africa has the highest PIT burden among upper middle-income countries, alongside one of the highest top PIT rates.”
PwC notes: “The PIT burden has increased significantly in recent years and is expected to amount to around 10.2% of GDP in 2025/26. We do not expect further significant PIT increases and expect that substantial fiscal drag relief will be given in Budget 2026.”
Corporate tax remains stable. “Against this backdrop, we do not anticipate any changes in the current CIT rate of 27%.”
Wealth taxes are also unlikely. “Accordingly, it is unlikely that any new wealth taxes will be announced in Budget 2026, notwithstanding perennial calls for such a tax by certain stakeholders.”
However, consumers will feel pain at the pump. “It is expected that the National Treasury will once again propose an inflationary increase in the general fuel levy in Budget 2026.” Regarding the RAF levy: “The government may take the opportunity to increase the RAF levy in line with inflation to ease the burden on the RAF, which is running at a deficit on an annual basis and is technically insolvent.”
On sin taxes: “We expect inflationary increases in excise duties for both alcohol and tobacco.” Regarding the sugar tax: “An increase in the levy in Budget 2026 appears unlikely. Nevertheless… the full repeal of the sugar tax in Budget 2026 also seems improbable.”
State-Owned Enterprises remain a focal point. “The progress in reforming SOEs has been encouraging, particularly Eskom’s unbundling and first profit in eight years.” However, “Municipal arrears (now 15% of Eskom’s total debt) remain a serious challenge.”
Municipalities are in distress. “Municipalities face severe liquidity challenges, with many unable to meet basic obligations.” Only “14 local councils out of 72 that signed up for National Treasury's debt relief intervention were sticking to their payment obligations as of late 2025”.
Security budgets are also under strain. “The defence budget for FY2025/26 stands at approximately R57-59bn, representing roughly 0.78% of GDP — well below the 1.5% target outlined in the 2015 Defence Review.”
Capability is compromised: “Only 27% of SANDF soldiers are reportedly healthy enough to deploy.”
Despite the challenges, there is hope. “S&P Global Ratings’ upgrade of South Africa’s foreign currency rating to ‘BB’ from ‘BB-’ in November 2025 — the first upgrade in nearly two decades — signals improved credibility.”
However, the path to investment grade is narrow. “South Africa remains two notches below investment grade(S&P), with further upgrades dependent on sustained fiscal consolidation, continued structural reforms, and improved growth performance.”
Monetary policy offers some relief. “The SA Reserve Bank (SARB) has cut the repo rate by 150 basis points since September 2024, bringing it to 6.75% as of November 2025.”
Ultimately, the budget must balance competing demands. “Our wish is for the Finance Minister to be transparent about funding sources and trade-offs.” As the country approaches Budget 2026, the avoidance of a VAT increase may be a political victory, but the document warns: “Managing the fiscal balance is essential to South Africa's credibility in the investor community.”