South Africa’s government has proposed increasing the value-added tax (VAT) by 1% spread over two years to fund additional spending. This proposal has encountered significant opposition within the coalition government and from various political parties, leading to delays and ongoing negotiations.

The African National Congress (ANC) and the Democratic Alliance (DA) have yet to reach an agreement on the budget, with the DA opposing the VAT increase, arguing it would harm the economy. Additionally, the Economic Freedom Fighters (EFF) have sought to block parliamentary voting on the budget, citing procedural concerns. ​Given the current political impasse and the need for further negotiations, it remains uncertain at the time of writing this article whether the proposed VAT increase will be implemented.

Should the 0.5% hike (suggested to take effect on 1 May) go ahead, we’ve outlined how this may impact consumers and investors.

You are not alone if you feel like you have stretched every rand for every cent it is worth. Should the VAT increase be passed, South Africans will be asked to be even more penny wise, or face the repercussions of being pound foolish on their pockets. Although the increase of 0.5% might not seem like much, it will impact consumer’s already-limited purchasing power even further. Incrementally, consumers will end up spending more in various spending pockets in addition to price hikes as the VAT increase takes hold of discretionary spending.

According to Finance Enoch Godongwana[1], the government acknowledges the financial strain on households due to rising food, fuel, electricity, and transport costs. To protect vulnerable communities, it plans to increase social grants above inflation, expand the list of VAT zero-rated food items, and maintain the fuel levy freeze for another year.

Currently, 21 essential food items are VAT-free to support lower-income households. From May 1, 2025, the government will extend zero-rating to include canned vegetables, dairy liquid blends, and specific edible offal cuts from sheep, poultry, goats, swine, and bovines.

As can be seen in the below example, an average spend of R150 on VAT (currently) across four buckets of fairly general expenditure, will lead to an increase spend of R20 per month (on VAT alone). Now, R20 might not seem like a lot, but, working with higher numbers, such as R10 000 and R20 can quickly turn into R200. Spending an additional R200 per month, translates to R2400 in additional spending per year.

Exhibit 1 | Example of 0.5% VAT increase on basic spending buckets

Source: Author’s own calculations. For illustrative purposes only.

Unfortunately, this direct translation of the increase in expenditure doesn’t adequately reflect the chain reaction that will ultimately be felt by consumers, as the liability of who will ultimately foot the bill spills over from one party to the next – but ultimately lands in the consumer’s pocket.

Let’s do a quick recap –

VAT applies to most goods & services except:

• Zero-rated items (19 basic food items like maize meal, rice, fresh fruit and vegetables; sanitary towels).
• Exempt services (public transport, educational services, certain financial products).

Damned if you do, and damned if you don’t – or is it the chicken or the egg?

At this stage, South Africans can’t be too sure what needs to, has to or has come first….

• Many indebted South Africans celebrated the lowering of the repo rate as it provided the possibility of a few rands extra to spend due to the lowering in debt-servicing cost
• Invested South Africans who rely on interest rates to earn an investment income, were likely not too pleased with losing out on earning this interest on their investments.

While we would all want nothing more than to be able to spend away in service of stimulating the economy, inflation and the impact of high interest rates (for prolonged periods of time) have had a big impact on South Africa’s spending power. As we highlighted in our article last month, in 1980 one litre of Sta-soft cost R1,99 versus R88,24 in 2024 (an increase of 4334%). The VAT increase will undoubtedly be felt incrementally over time.

As business input cost rise, so too will the cost of goods and services. If inflation persists, the SARB may respond with interest rate hikes, increasing borrowing costs. Businesses already hard-pressed with higher input cost might struggle to increase employee wages to assist with the pressure, which may well be exasperated by the lack of spending by consumers (as there is no discretionary spending left) leading to businesses having to deal with declining revenues.

How might this impact specific sectors?

• Retail, consumer goods, and discretionary sectors likely face reduced earnings as consumers cut back on non-essentials.
• Defensive stocks (utilities, telecoms, healthcare) are likely to be more resilient.
• Property: Construction and development costs increase (materials and services taxed at higher VAT). There might be a potential slowdown in property demand due to pressure on disposable income.
• Cash and Savings: Higher inflation erodes real returns on cash savings. However, interest rate hikes may offer marginally better deposit rates if passed on by banks.

Do what you can

Yes, anecdotes such as reviewing your monthly spending, and spending less on nice to have’s (such as electronics, clothing, and other luxury goods) will help and will be a must for most households. However, as prices increase this may no longer be a choice for some, but a choice between one necessity and the other. 

For consumers who are able to, it would be wise to consider the following –

• Review monthly spending:
  • Prioritise essential, zero-rated goods.
  • Cut back on discretionary purchases (electronics, luxury goods).
• Reduce debt exposure:
  • Focus on settling short-term, high-interest debt.
  • Prepare for possible increases in loan and home loan rates.
• Utility efficiency:
  • Lower electricity and water consumption to offset higher VAT-related utility bills.
• Preserve your savings:
  • Keep emergency savings intact to handle higher living costs without drawing from investments.

A 0.5% VAT hike may sound minor, but over time its cumulative effect on the cost of living and investment returns is significant. The key to financial resilience is proactive budgeting, debt management, and diversified investments that protect you against rising prices and potential rate hikes. Before making any major financial decisions in response to the VAT increase, it’s crucial to consult with your financial adviser to assess how these changes impact your specific situation and ensure your investment and budgeting strategies remain aligned with your long-term financial goals.

[1] Source: Moonstone, “Two (?) VAT hikes and no adjustments to the income tax brackets” published 13 March 2025.