Brace for more tax increases written by Bianke Neethling

[Nat Quinn]

South Africans should brace for an increase in the fuel levy, above-inflation increases in sin taxes, and the continued freezing of personal income tax brackets in the 2025 Budget.

In a recent research note, the Bureau for Economic Research’s Claire Bisseker said that more routine tax hikes are inevitable in the short term.

In this research note, Bisseker urges the government to use the postponement of the 2025 Budget Speech to its advantage.

This comes after Finance Minister Enoch Godognwana had to delay the tabling of the Budget on 19 February.

Members of the Government of National Unity (GNU) could not come to an agreement on the Budget, and it was, therefore, postponed to 12 March 2025.

The debate around the Budget centred mainly on tax hikes the National Treasury planned to introduce, with the DA saying it could not support a Budget that planned to raise value-added tax (VAT) by 2 percentage points.

Bisseker said that while this was a setback for the National Treasury, the postponement should be seen as an opportunity for fiscal reform.

She explained that the Budget exposed contradictions between the government’s expansive policy agenda and its limited financial resources.

She pointed out that South Africa’s budget deficit remains persistently high due to excessive government spending relative to its tax base.

In addition, she explained that tax hikes, particularly on personal income tax (PIT) and corporate tax, are seen as increasingly ineffective, while borrowing more is unsustainable given the country’s rising debt-service costs.

The postponed Budget included significant new spending on social grants, public sector wages, and frontline services in health and education, which would have eased austerity but at the cost of higher taxation.

In essence, the National Treasury wanted to shift the burden of fiscal consolidation onto taxpayers rather than the government.

Since higher personal and corporate income taxes and a 2% VAT hike are not an option, Bisseker said the government will need to cut spending if it wants more money for reforms. However, the question remains where to find the “fat”.

Bisseker said a wholesale review of spending with a view to closing non-performing projects and programmes has become urgent and unavoidable.

“But while there is undoubtedly fat in the system, the notion that a bloated backroom bureaucracy exists that can be easily culled without impacting frontline services has been debunked by research by the Public Economy Project at Wits University,” she said.

This project found in 2022 that within core public services, the balance between professional and administrative staff appeared “stable and sensible”.

Any “bloating” was concentrated in economic regulation, infrastructure services, and public administration.

“Even so, total employment in all public administration departments was less than 40,000 compared to more than 1 million in healthcare, education and criminal justice.”

She explained that two-thirds of government consumption spending is concentrated on basic education, healthcare and criminal justice.

These core public services are inherently labour-intensive, accounting for more than 85% of government employees.

Therefore, these sectors will bear the weight of fiscal consolidation, as there is limited scope to reduce employment elsewhere.

“This implies, according to the report, that further ‘large and damaging’ cuts will be required to the number of nurses, teachers, and police officers on top of the significant downsizing these departments have endured in recent years,” Bisseker said.

This is concerning, as government education spending had already fallen to about R16,500 per learner in real terms by 2021 from about R20,000 per learner in 2009.

The basic education department now estimates, based on its Medium-Term Budget allocations, that the sector will have been underfunded by around R79 billion by 2027/2028.

Further significant tax hikes and higher borrowing are seemingly off the table, yet the government still needs to address large spending requirements in health, education and other critical frontline public services.

Bisseker warned that, in the short term, this means further routine tax hikes remain inevitable.

“So brace for an increase in the fuel levy, above-inflation increases to sin taxes, and probably the continued freezing of PIT brackets on 12 March,” she said.

She said it is also likely the new budget will defer some new spending, like the continuation of public employment programmes, until the Treasury has figured out a sustainable way to fund them.

One suggestion Bisseker made was that the government could sell valuable, underutilised land and buildings over the medium term.

The Public Works and Infrastructure Department has compiled a list of R155 billion worth of government assets that could be sold.

In addition, the state owns 2.6 million hectares of agricultural land, which, at an average price of R10,000/ha, could generate another R25 billion.

“But, most importantly, economic reforms must be urgently accelerated to raise the growth rate,” she said.

“If events of the past week allow that penny to finally drop at the top of government, then the entire budget bungle will have been worth it.”

source:Brace for more tax increases – Daily Investor

 

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