South Africa’s VAT to Increase to 16% Enoch as Godongwana Delivers GNU Budget Speech

Finance Minister Enoch Godongwana delivered the much-anticipated GNU Budget Speech for the 2025/2026 financial year, unveiling a series of bold fiscal decisions aimed at steering South Africa’s economy toward recovery. Against the backdrop of growing concerns about economic stagnation, rising debt levels, and constrained public service delivery, the Minister laid out a roadmap that seeks to balance fiscal consolidation with socioeconomic relief. One of the headline announcements was a phased increase in Value-Added Tax (VAT), a move that has already sparked widespread debate across sectors.

Godongwana announced that VAT would increase by an additional 1%, implemented in two stages. The first half a percentage point will take effect in 2025, while the remaining 0.5% will be implemented in 2026, bringing the overall VAT rate to 16%. This is the first VAT adjustment since 2018 and comes at a time when government revenue remains under pressure, while expenditure demands continue to grow. The Minister explained that the increment is a necessary measure to boost the country’s fiscal position and ensure long-term sustainability of government services and infrastructure projects.

While the VAT hike may be seen as a pragmatic approach to raising additional revenue, it also raises concern over its potential impact on the cost of living. Many South Africans, already grappling with rising inflation and stagnant wages, are expected to feel the pressure of the additional tax burden. Critics argue that the increase could deepen inequality and reduce household purchasing power, particularly for low- to middle-income earners. However, the Minister attempted to offset some of the anticipated economic pain by expanding the list of zero-rated food items, which are exempt from VAT.

In a move welcomed by consumers and civil society organisations, Godongwana announced that essential food products such as milk, dairy products, meat, and vegetables will now be included in the zero-rated basket. This decision aims to protect the most vulnerable households from the brunt of the VAT increase and ensure that basic nutrition remains affordable for all. The Minister emphasized that this expanded list is part of a broader strategy to safeguard food security and provide relief where it is most needed. He further noted that the government will continue to assess the VAT framework and make adjustments in future budget cycles if economic conditions require it.

Beyond tax policy, the Budget Speech also focused on infrastructure investment and service delivery enhancement. A significant allocation of R19.7 billion has been earmarked for the Passenger Rail Agency of South Africa (PRASA), a move aimed at revitalising the country’s public transport system. The funds will be used to purchase new trains and ensure that train services are available every 10 minutes during peak hours. This investment is seen as critical not only to improving commuter experience and transport reliability but also as a driver of economic mobility and urban development.

Godongwana noted that a well-functioning rail network is essential for reducing congestion, lowering transportation costs, and supporting economic inclusion, especially for working-class communities who rely heavily on affordable public transport. The revitalisation of PRASA is expected to create jobs, boost confidence in state-owned entities, and stimulate broader economic activity through improved logistics and commuter services.

The Minister also touched on the broader macroeconomic outlook, acknowledging the challenges posed by high unemployment, energy insecurity, and global economic uncertainty. He reiterated the government's commitment to structural reforms, improved governance, and efficient public spending. He emphasized the importance of rebuilding state capacity and creating an environment conducive to investment, innovation, and entrepreneurship.

The 2025/2026 Budget appears to be a delicate balancing act—an attempt to raise revenue without overburdening the poor, while also investing in critical infrastructure to support economic growth. Whether these measures will yield the intended results remains to be seen. However, it is clear that the government is grappling with tough choices in an increasingly complex fiscal environment.

South Africans will now watch closely as these policies are implemented, hoping that the VAT increase does not result in unintended hardships and that the relief measures introduced are sufficient to counteract the pressure on household budgets. As the country enters a new fiscal year, the key question remains: Is the South African economy on the path to recovery, or are these measures merely temporary fixes for deeper systemic issues?

The coming months will be critical in testing the effectiveness of these budgetary interventions and determining whether South Africa can truly turn the tide toward sustainable growth and inclusive development.