By Lehlohonolo Lehana.
Recent announcements in the Budget Speech 2025, including the increase in the Value-Added Tax (VAT) rate, have sparked discussions about the best fiscal choices for South Africa’s future.
PWC released a report, ‘Responsible growth for a sustainable future’ that reflect on the broader context of South Africa’s tax increase choices, levers to improve economic growth and the need for climate-resilient infrastructure.
South Africa has seen large fiscal deficits over the past decade, resulting in substantial increases in the public debt burden and the amount of money spent on debt servicing. As such, the National Treasury is in search of ways to shore up its revenues towards reducing the fiscal deficit today and, over time, reduce its debt burden.
In the Budget Speech 2025, the finance minister Enoch Godongwana proposed that value-added tax (VAT) increase by 0.5 percentage points to 15.5% on 1 May 2025 and another 0.5 percentage points in April 2026. It is estimated by the National Treasury that this could generate R43bn in additional fiscal revenues over the next two financial years.
PWC believe that there are other options available for the National Treasury to also consider as it looks for additional tax revenues. One option would be to invest in narrowing the tax gap (the difference between taxes owed and taxes collected), currently estimated at between R400bn and R450bn.
Kyle Mandy, PwC Africa Technical and Tax Policy Leader, says:
“While it is unrealistic to expect that there would be no tax gap in South Africa, a gap of around 20% of theoretical revenues is high. If the country’s tax gap could be narrowed by only 10% in 2025/2026, that would give rise to an additional R40bn to R45bn in revenue and would remove the need for VAT increases.”
Another option is revising the Southern African Customs Union (SACU) revenue sharing formula, which in 2025/2026 will see R73.5bn paid over to some of our neighbouring countries.
The SACU agreement provides for duty-free trade between Botswana, Eswatini, Lesotho, Namibia and South Africa.
In 2025/2026, the cost to South Africa of this deal—in the form of revenues foregone relating to domestic consumption of dutiable goods—is estimated by the National Treasury at R73.5bn.
This foregone revenue must be weighed up against the benefits to South Africa of having duty-free access to its neighbouring markets; exports by South Africa to the SACU economies amounts to around R200bn annually.
Accelerating economic growth to create more tax revenues
Plans around VAT increases, the size of the tax gap and adjusting the SACU revenue sharing formula might be less of a focal point if South Africa’s economy was growing at a healthier pace. Real GDP growth measured only 0.6% in 2024, down from an already meagre 0.7% in the preceding year.
Meanwhile, population growth exceeds 1.0% per annum. As a result, the country’s real GDP per capita has now been declining for the better part of a decade.
There is a close relationship between nominal economic growth and tax revenue growth, with a long-term average of 1:1. So, if we can get the economic levers right, we can help improve the course of the fiscal ship.
One of the ways that South Africa’s economy can grow faster is through productivity gains. We know what the levers are that need to be pulled to accelerate South Africa’s productivity and economic growth, with energy, logistics and infrastructure being some of the main ones.
Lullu Krugel, PwC South Africa Chief Economist, says:
“South Africa’s private sector has in recent years forged strong cooperative relationships with the government in support of enabling key reforms in critical bottlenecks for economic growth. Work in energy, transport and logistics, and crime and corruption have had some positive results, though as the meagre economic growth numbers for 2023–2024 shows, more work still needs to be done.”
Investing in climate-resilient infrastructure
Budget Review 2025 announced that, over the next three years, R1tn will be spent on public infrastructure. This is a massive investment in physical capital—a key contributor to economic productivity.
However, frequent references in Budget Review 2025 to infrastructure spending are not accompanied by discussions about the impact of climate and weather on infrastructure.
This is because, while South Africa wants to increase funding for climate-resilient infrastructure, the fiscus cannot afford to financially support the amount of investment that is required.
Read more here:https://www.pwc.co.za/en/assets/pdf/budget-2025.pdf.