How government spends every R100 you pay in tax

Nobody likes to pay tax and we like to complain about it, but do you know how every R100 you pay in tax is spent?

According to an infographic PSG Wealth compiled after the minister of finance’s Budget 2025 Speech, government will spend R16.39 on debt service costs, R13.49 on basic education, R12.46 on social protection and R11.53 on health, in the same order as in 2024.

Last year government spent R16.13 for debt service costs, R13.70 for basic education, R12.59 for social protection and R11.48 on health.

Government will spend a further R11.05 on community development, R6.78 on economic regulation and infrastructure, R5.65 on post-school education and training, R5.55 on police services, R3.84 on social security funds and R2.35 on defence and state security.

In 2024 government spent R11.20 on community development, R6.17 on economic regulation and infrastructure, R6.08 on tertiary education and training and R5.28 on police services.

The rest of the money goes to law, courts and prisons (R2.24), public administration and fiscal affairs (R1.99), industrialisation and exports (R1.57), agriculture and rural development (R1.13), job creation and labour affairs (91 cents), innovation, science and technology (78 cents) and executive and legislative organs (49 cents).

The little money that is left goes to home affairs (54 cents), arts, culture, sport and recreation (48 cents), payments for financial assets (44 cents), external affairs (35 cents) and contingency reserves (19 cents).

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Government again spending more than the R100 it will collect in tax

Finance minister Enoch Godongwana said in his Budget 2025 speech that government expects to collect R2.2 trillion tax during the current financial year, while government expects to spend R2.59 trillion, leaving the country with a budget deficit of R370.4 billion, a sizeable amount more than the R332.4 billion of 2024. In 2023, the budget deficit was R347 billion.

Revenue makes up 27.8% of gross domestic product (GDP), while expenditure makes up 32.4%, the budget balance -4.6% and debt service costs of R424.9 billion make up the remaining 5.3% of GDP.

Ronald King, head of public policy and regulatory affairs at PSG Wealth, says government will achieve a primary budget surplus of 0.5% of GDP in 2024/2025, which will increase to 0.9% in 2025/2026. “Strengthening the primary surplus will serve as a fiscal anchor to stabilise debt by the end of 2025/2026. Larger primary surpluses are expected thereafter to reduce debt as a percentage of GDP.”

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Increase in primary budget surplus essential for economic growth

King points out that an increase in the primary budget surplus is essential for economic growth. “If the growth rate of an economy is less than the interest rate the country pays on its debt, its debt-to-GDP ratio will continue to increase exponentially unless government can run a large enough primary surplus.

“South Africa’s growth rate has been lower than the interest rate on government debt since 2018. Given these circumstances, debt-to-GDP levels can only stabilise if and only if the primary budget is zero or in surplus.

“A failure to run a large enough primary surplus will mean that interest payments on government debt will continue to add to the debt burden at a faster rate than economic growth can reduce the debt burden.”

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Debt service costs eat up 22 cents of every rand of tax revenue

King says debt service costs currently consume 22 cents out of every rand of revenue and are expected to peak this year before declining. IN addition, he points out that debt service costs consume a greater share of the budget than social development, health, community development, economic development or peace and security.

“This highlights the urgency of bringing debt under control while prioritising measures that will directly enhance productivity and growth. If debt service costs begin to decline, more resources will be available to solve challenges, debt metrics and creditworthiness will improve and unemployment and poverty will start to decline.”

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Will VAT solve the problem of not enough tax revenue?

Government decided to increase the VAT rate by 0.5% this year and another 0.5% next year due to several new and persistent spending pressures, bringing VAT to 16% in 2026/2027. King says this will enable the funding of key public services such as education, health and transport.

He says government considered alternatives, such as increasing corporate and personal income tax, but ultimately decided against it because of the detrimental effects on investment, job creation and economic growth.

“Increasing personal income tax rates will not generate the necessary revenue, as taxpayers make adjustments to reduce their tax liabilities. Higher tax rates also reduce the incentive to work and save, which will have larger impacts across the economy.”

King says increasing corporate tax rates on the other hand discourages investment and job creation and ultimately yields less revenue than increasing the VAT rate. Corporate tax collections declined over the last few years as a result of falling profits and an operating environment worsened by logistics constraints and rising electricity costs.

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Additional debt not an option

He points out that taking on additional debt is not an option either, as it would result in higher debt service costs, reduce future spending capacity, raise interest rates and dampen investment across the economy.

South Africa’s sub-investment credit rating would also make additional borrowing more expensive and increase South Africa’s risk of even further downgrades.

King says it must be noted that an increase in the VAT rate would harm all households, in particular poor and low-income households, especially when viewed in the context of an environment of high real interest rates that continue to constrain demand in the economy.

“An increase in the VAT rate would cause inflation to increase and reduce the buying power of consumers. While it has been argued that zero rating can be used to ease the burden, previous efforts had limited success.”

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No guarantee VAT zero-rating will help consumers

Deputy finance minister David Masondo has admitted that “suppliers did not pass on the benefit of the VAT relief to consumers as was intended”. Therefore, King says, there is no guarantee that zero rating will sufficiently lower prices for consumers, leaving poor households exposed to higher prices.

“The generation of VAT revenue also depends on the level of spending by households, companies and government, whose spending depend on current and expected levels of economic growth. If economic growth is weaker than expected, spending behaviour will be adjusted and the growth in VAT revenue is likely to falter. This is the issue National Treasury faced in 2018 when VAT was increased from 14% to 15%.”