VAT, Politics, and the Price of Borrowing: A Fiscal Crossroads for South Africa

VAT, Politics, and the Price of Borrowing: A Fiscal Crossroads for South Africa 

In the weeks leading up to Freedom Day 2025, South Africa’s financial narrative took a sharp turn. What began as a technical proposal to raise VAT was abruptly shelved amid political turbulence and legal intervention. The reversal marked more than a fiscal U-turn — it revealed a new era of budget-making in South Africa, one where parliamentary arithmetic and market sentiment weigh as heavily as the Finance Minister’s pen. 

A New Political Reality in Budgeting 

As JP Landman insightfully outlined in his political analysis for Nedbank Private Wealth, the aborted VAT increase is emblematic of a transformed political landscape. For the first time since democracy, South Africa’s Parliament holds real power to influence — and alter — the national Budget. No longer can the governing party assume guaranteed passage of fiscal proposals. The shift, catalyzed by the ANC’s loss of its parliamentary majority in 2024, now demands coalitional consensus on every cent. 

This new dynamic came to a head when the Western Cape High Court halted the implementation of the proposed VAT increase on April 27, 2025. The move forced Finance Minister Enoch Godongwana to reconsider a cornerstone of his revenue strategy — a 0.5% VAT increase in 2025 followed by another in 2026. The combined loss to the fiscus: R13.5 billion in the current year and an estimated R75 billion over three years. 

Missed Lessons from the Past 

Landman draws a stark comparison to 1993, when then-Minister of Finance Derek Keys successfully raised VAT from 10% to 14% in a single budget cycle. The difference? Keys engaged all political and societal stakeholders before tabling the numbers. His consultative approach built the trust necessary to enact such a bold move — a lesson lost on the current administration. What could have been a technical fiscal adjustment instead became a constitutional and political flashpoint. 

Fiscal Fallout and Shrinking Revenue 

With the VAT increase scrapped, Treasury must now rework its budget framework under tighter constraints. This task is complicated by broader economic shocks. New US trade tariffs have shaved 0.5% off South Africa’s growth forecasts, and the withdrawal of international funding — notably for HIV/AIDS and research through PEPFAR and the NIH — adds more than R9 billion in spending pressure. 

Treasury’s strategy hinges on maintaining a

primary surplus (surplus before interest payments) of R71 billion this year to stabilize debt. But the gap left by foregone VAT revenue and declining growth now threatens that balance. Parliamentarians face a difficult question: if tax hikes are off the table, are they prepared to cut spending — and where? 

Understanding the True Cost of Borrowing 

Borrowing remains an option, but it carries consequences. Even with the VAT increase originally included, the Budget projected R394.6 billion in borrowing this year — more than R1 billion per day. A mere 0.01% (1 basis point) increase in interest rates adds R39 million in annual costs. The political turmoil surrounding the budget has already pushed rates up by 20 basis points, translating to R2 million in extra daily interest. That’s nearly R730 million a year lost to instability — money that could fund thousands of healthcare workers or teachers. 

Markets Respond to Political Signals 

The bond market — where government debt is priced and sold — reflects this tension. After the GNU was formed, confidence pushed long-term interest rates below 10.6%. But April’s political fallout saw rates spike to 11%. While international factors like US trade policy played a role, local political uncertainty was a major contributor. Higher bond yields don’t just increase government borrowing costs — they set the price of capital across the economy, impacting private investment and job creation. 

So, What’s Next? 

Parliament’s new fiscal power comes with weighty responsibilities. Having blocked the VAT hike, opposition parties must now support either expenditure cuts or propose credible alternatives. General calls to “cut corruption” or “protect frontline services” won’t fill the gap without concrete decisions. 

As Landman warns, fiscal policy now lives at the intersection of economics and politics. Parliamentarians must weigh the populist allure of short-term relief against the long-term imperative of debt stability. The consequences of mismanagement will be borne not just by ratings agencies and bond traders, but by South African households facing higher costs and slower growth. 

A Moment of Choice 

The reversal of the VAT hike wasn’t just a policy failure — it was a signal that South Africa’s fiscal governance is evolving. With that evolution comes both risk and opportunity. Landman rightly concludes that this is a moment of decision. South Africa’s legislators must balance the will of the electorate with the realities of debt, interest, and growth. Sound fiscal management is no longer just Treasury’s job — it’s now a test of political maturity. 

References 

• Reuters. (2025, April 24). South Africa withdraws planned VAT hike after political pushback. Retrieved from https://www.reuters.com/world/africa/south-africa-withdraw-planned-vat-hike-finance-ministry-says-2025-04-23/ 
• South African Government. (2025, April 24). Treasury on reversal of VAT increase. Retrieved from https://www.gov.za/news/media-statements/treasury-reversal-vat-increase-24-apr-2025 
• This article draws heavily on insights from JP Landman’s May 2025 political note, “Budget 3.0: A Moment of Decision,” prepared for Nedbank Private Wealth Investment Research and Fund Management. The analysis was developed in Landman’s personal capacity.