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Parliament is yet to sit and approve or reject the proposal by the Minister of Finance Mr Enoch Godongwana to increase VAT by 1% over two fiscal periods; however, politicians and business alike are opposed to the proposal.
The hike in VAT has been a bone of contention amongst the members of the government of National Unity (GNU), business has also expressed its concern regarding the increase citing that poor will be the most affected that there are other ways to get funds rather put more strain on citizens.
Naamsa also adding its voice of disapproval says the timing of raising VAT is wrong in the current economic conditions. The Automotive Business Council says the increase in VAT will place an overwhelming burden on household spending, reduce disposable income, and curtail consumer confidence, which are key drivers of economic activity.
“This decision comes at a time when households are already struggling under the weight of rising energy costs, elevated debt levels, and slow wage growth,” said Mikel Mabasa, the CEO of Naamsa.
Expressing concern, Mabasa says the government has opted for fiscal consolidation at a time when countercyclical measures are needed to support economic recovery. Raising VAT in a period of weak consumer spending is inherently contractionary, dampening aggregate demand when household consumption accounts for over 60% of South Africa’s GDP.
He says this policy choice could inadvertently reinforce stagnation, trapping the economy in a low-growth cycle.
“Transport expenses are a significant part of household budgets, accounting for 14% of total consumer expenditure. The VAT increase to 16% by 2026/27 will drive up vehicle costs, fuel prices, public transport fares, and maintenance expenses, worsening affordability constraints.
This regressive tax measure will disproportionately affect lower-income households, forcing them to divert spending from essential goods and services, further reducing overall consumer demand. The government’s debt-reduction strategy aims to lower debt servicing costs by 5% over five years, but its success is contingent on optimistic assumptions about GDP growth, tax compliance, and expenditure discipline. If these assumptions do not materialize, the VAT hike may fail to deliver its intended fiscal benefits, leading to continued borrowing and an even higher debt burden,” said Mabasa.
Mabasa pointed out that for the automotive industry; these measures will suppress vehicle demand and consequently reduce production volumes. The misalignment between monetary policy easing [interest rate cuts] and fiscal tightening [higher VAT and energy costs] will neutralize any intended stimulus, leaving households and businesses constrained by affordability pressures.
“Naamsa urges the government to reassess the VAT increase timeline, explore alternative revenue measures, enhance energy security, and improve policy alignment. Without such interventions, South Africa risks further economic stagnation, declining industrial competitiveness, and worsening household financial distress,” appealed Mikel Mabasa.
