In his National Budget Speech today, finance minister Enoch Godongwana proposed an increase in value added tax (VAT) to generate revenue for essential public services, including health, education, transport, and security. The gradual increase will see the VAT rate rising by half a percentage point in 2025/26, followed by another half a percentage point in 2026/27, ultimately bringing the rate to 16% by the latter year.
Godongwana delivered the much-anticipated budget in parliament earlier today following last month’s postponement after the government of national unity (GNU) disagreed on the then-proposed 2% VAT increase.
He said even though the route they had taken was less favourable, they thoroughly examined alternatives to raising the VAT rate. Godongwana said the government weighed up the policy trade-offs involved, including increases to corporate and personal income taxes.
“Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades,” he said.
No other alternative
Godongwana explained that taking on additional debt to meet the spending pressures was also not feasible as the amount was simply too large to continue borrowing in an ailing economy where revenue was low.
“Increasing corporate or personal income tax rates would generate less revenue, while potentially harming investment, job creation and economic growth. Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs.
“The VAT is a tax that affects everyone. By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered.
The increase is also the most effective way to avoid further spending cuts and to enable us extend the social wage.”
To help relieve the burden of households, the minister announced that more items will be included on the zero VAT items list. These will include canned vegetables, dairy liquid blends, and organ meats from sheep, poultry and other animals.
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Disaster management
Godongwana said the country faces numerous disasters such as adverse weather and the government had allocated R1.7 billion to respond to future disasters over the medium term, while R4 billion is provisionally allocated to address backlogs in recovery efforts for provinces and municipalities.
“The incentives in our current disaster management system are skewed towards relief and rehabilitation when mitigation and readiness to minimise damage is the most cost-effective response.
“Our municipalities stand at the frontline of disaster response yet they are hamstrung by aging infrastructure, bureaucratic fragmentation, and limited access to emergency funds,” he said.
Going big on infrastructure
On water, Godongwana said the government is investing in several large-scale dam projects.
“The Berg River-Voëlvlei Augmentation Scheme is expected to start in July 2026. The project will improve the Western Cape’s Water Supply System, improving regional water security while reliably supplying domestic, agricultural and industrial water users,” he said.
Godongwana added that for the next three years, the government is going to focus on public infrastructure. They have set aside R1 trillion, with the tune of R156.3 billion for water and sanitation, R219.2 billion for energy infrastructure and R402 billion for transport and logistics.
Sin tax
“Infrastructure is a key pillar of our growth strategy. It is the bedrock for economic development, a key source of jobs, and an avenue to scale upservice delivery,” he said.
The government propose to increase excise duties on alcoholic beverages by 6.75% for 2025/26.
Meanwhile, South Africa Wine expressed its disappointment with the government’s disregard for the wine industry in today’s budget announcement.
“Despite months of intense engagement with the National Treasury, where we presented clear evidence of the impact of excessive excise hikes, the minister of finance has proceeded with a tax regime that will negatively impact producers, accelerate job losses, and threaten rural economies.
“Producers are under pressure, small-scale farmers and businesses will struggle to survive. The sector, which supports over 270 000 jobs, now faces further economic strain,” South Africa Wine said in a statement.
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