U-Turn on VAT Hike Spares Inflation, But Budget Cuts Still Loom for the Poor

In a surprise reversal, Finance Minister Enoch Godongwana has confirmed that South Africa’s VAT rate will remain at 15% — a decision that offers relief to inflation-weary consumers, but still leaves a R75 billion hole in the country’s budget.

Just days before the increase was set to take effect on May 1, National Treasury announced the government will scrap the proposed VAT hike to 15.5% for 2025. The initial February Budget had even proposed a jump to 17%, drawing criticism from economists, civil society, and opposition parties.

Investec senior economist Annabel Bishop previously warned that each 0.5% VAT increase would push inflation up by 25 basis points. Fortunately for households, inflation — which dipped to 2.7% in March — won’t take an immediate hit from this abandoned plan.

But the good news comes with a catch.

Without the additional tax revenue, Treasury acknowledges it will now fall R75 billion short over the medium term. That means budget cuts are on the table, particularly for programmes that would have cushioned the poor from the higher cost of living.

“Parliament will be requested to adjust expenditure in a manner that ensures the loss of revenue does not harm South Africa’s fiscal sustainability,” the statement reads.

Legal Pressure Behind the Reversal

The announcement follows mounting political and legal pressure. Earlier this week, the Democratic Alliance (DA) and Economic Freedom Fighters (EFF) launched court action to halt the increase, calling the underlying fiscal framework “unlawful.”

The DA argued that the Budget was being imposed without full agreement in Parliament. Meanwhile, ActionSA claimed a partial legal victory, saying National Treasury had 30 days from April 1 to present alternatives.

Facing the heat, Treasury confirmed that the Minister will soon introduce a new Revenue Laws Amendment Bill, formally keeping VAT at 15%.

Relief Today, Cuts Tomorrow

While the reversal offers temporary relief, it also scraps earlier Budget plans to expand zero-rated VAT items aimed at protecting low-income households. Those plans were tied to the broader VAT hike and are now being reviewed.

Godongwana is expected to table a revised Appropriation Bill and Division of Revenue Bill in the coming weeks, outlining new paths to restore funding for critical public services.

Treasury’s statement acknowledges the original VAT proposal was driven by the “urgent need to replenish funding” for key services that have suffered under fiscal pressure. The department says it is still weighing alternative proposals to increase revenue without raising VAT.

While this U-turn prevents immediate inflation spikes, the bigger question now is where the axe will fall. With billions missing from the Budget and service delivery already under strain, it’s South Africa’s most vulnerable who may still bear the brunt of tough fiscal decisions.

{Source: IOL}

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