A R1 billion U-turn: Scrapping the VAT increase leaves no winners, just absolute chaos

There are no winners in the scrapping of the VAT increase, just absolute chaos, says financial analyst Professor Jannie Rossouw.

The visiting professor at the Wits Business School told The Citizen the economy of South Africa cannot be run in such a haphazard way, and Finance Minister Enoch Gondongwana’s head may roll over it.

He claimed Godongwana lost credibility after he insisted in his affidavit for the court case against the VAT increase that there was no other way to increase revenue.

“This kind of behaviour means there is no policy certainty in the country and it is bad for business and investor confidence.”

A R1 billion U-turn?

He estimates that preparing for the VAT increase of 0.5% on 1 May will cost the country R1 billion at a time when nobody can afford to waste money.

Rossouw said the only good thing about scrapping the VAT increase was that it may help inflation.

“The minister also did not give enough information in his statement about what will happen now and what the consequences of scrapping the VAT increase will be.

“The big question is, of course, who in the ANC blinked and put enough pressure on Godongwana? If we get an answer to this question, we will know more about the power shift in the ANC.”

ALSO READ: Treasury reverses proposed VAT hike, will remain at 15%

Where will Treasury find money now that VAT increase is scrapped?

Jee-A van der Linde, senior economist at Oxford Economics Africa, says while businesses and consumers will breathe a sigh of relief that the VAT hike will not go ahead, the latest move does not solve National Treasury’s funding gap conundrum and South Africa will face the same budget predicament next year.

“The decision to scrap the VAT increase does not change our forecast for South Africa, nor will it have a meaningful impact on the economy. However, political parties will use the announcement to take charge of the popular narrative and make competing claims of victory while taking cheap shots at each other.

“We argued that the proposed inflationary consequences of a 0.5% increase in the VAT rate would have been less than the impact it would have on economic growth.

“Higher VAT would have placed undue pressure on consumer spending growth, the only area of the South African economy that has performed reasonably well in recent quarters.”

ALSO READ: Economic ramifications of VAT increase: higher inflation, lower GDP

Economic outlook deteriorated after Budget 2025

Van der Linde points out that shifts in the broader economic landscape have seen South Africa’s economic growth outlook deteriorate notably since the initial Budget 2025 readings, with National Treasury’s 1.9% real gross domestic product (GDP) growth forecast for 2025 now seen as far too optimistic.

The IMF also slashed South Africa’s 2025 real GDP growth forecast to 1.0%, and Van der Linde says Oxford Economics Africa also noted at the start of the second quarter that the domestic economy will be lucky if it grows by 1.0% this year.

He warns that Treasury’s lofty economic growth forecasts in the near term mean there is an increased risk that South Africa will miss its fiscal revenue targets this year, as was the case in previous years.

“Even so, a 0.5% VAT increase would not have been the solution for Treasury’s funding gap, and although a 2% increase in VAT probably would have made Treasury’s budgeting task easier, it would have been too disruptive and burdensome for the economy.

“By constantly missing revenue and spending targets, government’s failure to arrest the increase in debt levels damages Treasury’s credibility. Meanwhile, the sudden rise in South African government bond yields at the end of March suggests that Treasury’s debt-service cost forecasts must be revised higher.

“In addition, amid heightened uncertainty, we do not believe that the South African Reserve Bank is going to lower interest rates in the near term, and this also feeds into higher borrowing costs.”

ALSO READ: Budget 2025 passed with VAT increase while rand tanks

Flip-flopping about VAT increase sends wrong message to investors

Van der Linde warns that the political flip-flopping about tax proposals has created confusion, which sends the wrong message to foreign investors and contributes to undue cost-of-doing-business pressures.

“South Africa’s Budget saga, which began on 19 February 2025 when Godongwana postponed his Budget 2025 speech, has dragged out for far too long.

“Moreover, the politicking that ensued and the division it created among government parties have eroded the policy predictability many expected under the government of national unity (GNU).”

Meanwhile, the global economy has been upended by US tariffs, which place uncompetitive economies such as South Africa at a disadvantage, he says.

“It remains unclear what the way forward will look like, where Treasury will find alternative revenue sources and how sustainable those will be.

“If increased borrowing were to form part of new funding sources over the Medium-Term Expenditure Framework (MTEF) period, rating agencies and investors would get more concerned. Unless the GNU can agree to fast-track more business-friendly policies, we expect more fiscal slippage.”