- The new budget contains a smaller VAT hike than February's version, and it's spread over two years.
- But the now complete lack of inflation adjustment to personal income tax rebates and tax brackets will hurt households.
- Also, welfare grant hikes have been trimmed compared to February's budget.
- For more financial news, go to the News24 Business front page.
While Budget 2.0 does not have the previous version's monster VAT hike, it will still hurt.
Households paying personal income tax will be hit as rebates and tax brackets haven't been adjusted for inflation - for the second year in a row.
Also, VAT will still be increased by 0.5 percentage points this year - with a similar-sized hike in 2026, bringing it to 16%. But, in his speech, Finance Minister Enoch Godongwana said that the second hike may be reconsidered.
For now, Treasury is desperately seeking more money to help ease SA's debt burden, which has spiralled from below R2 trillion a decade ago to closer to R6 trillion - or more than 76% of GDP.
While public debt has climbed from around R70 000 per working-age South African to R115 000 in a decade, the continued economic slump has seen real GDP fall from around R80 000 to below R75 000 a person.
Some 22 cents out of every rand earned in tax are now used to repay debt.
Government was hoping that its budget deficit would only reach 4.5% of GDP in the past year, but in fact it turned out to be 5%.
This was due in part to a disappointing tax take, which was R17 billion below budget. While withdrawals from the new two-pot retirement system yielded almost R12 billion in tax, import VAT collections fell and fuel levies disappointed as the lack of load shedding hit diesel demand. Spending also has to be increased to fund troops in the Democratic Republic of the Congo, the fallout from the eToll failure, and a hike in the Covid-19 Social Relief of Distress grant.
This year, government must also make provision for an above-inflation 5.5% hike in public sector wages, which will cost taxpayers an additional R7.3 billion.
Still, Treasury is hoping that the worst of the debt blowout is over, and projecting that the budget deficit will decline to 3.5% of GDP by 2027.
This will be thanks, in part, to an expected R28 billion that could be earned from this year's VAT hike and personal income bracket creep.
Compared to February's budget, the new version has also trimmed spending on welfare grants.
In February's budget, child support grants were hiked from R530 to R580 a month - but in the new budget, the increase will only be to R560. Old age and disability grants were initially supposed to rise from R2 185 to R2 335, but beneficiaries will now only receive R2 315.
Treasury says that spending on social grants will grow by 5.3% over the medium term, above inflation.
"However, social grant reform and efficiency savings will be necessary to ensure the sustainability of the social security system."
The welfare payments and employment support programmes are currently being reviewed, but this is proceeding more slowly than anticipated, it added. For now, another R35 billion was allocated to the Covid-19 social relief of distress grant, which will be extended by another year until 31 March 2026, but remains at R370 per month.
The new budget does not contain much government spending cuts. Spending will still increase by 5.6% in the next year, with another R47 billion added to infrastructure investments.
This means that over the next three years, more than R1 trillion will be spent on roads, water and energy. A new unit will now be established in National Treasury to oversee investment projects and funding.
Is Budget 2.0 final?
While Godongwana was able to deliver his budget speech on Wednesday after sign-off from Cabinet, the budget is not a done deal. The DA doesn't support it and the ANC needs a majority to pass it in Parliament.
In a media briefing before he tabled the budget, Godongwana said there were tensions in the DA because they had "lost a couple of battles", including on the NHI, BELA, and expropriation laws.
"They want to win something."
Godongwana said that the DA supported the 0.5-percentage-point VAT hike - on condition that are other things are being addressed "some of which are outside the budget". He implied that this included land expropriation legislation.
"[There's a] whole range of grievances they have which are above my paygrade."
The budget may still be adapted in the parliamentary process before it becomes law.
For now, these are the main implications of the budget that was tabled:
Personal income tax blow
While in February's budget there was some proposed adjustment for inflation in the personal income tax brackets - in the new budget, there's none.
Usually, personal income tax brackets are adjusted to preserve inflation-linked increases. But this is the second year of no adjustments.
This has a big impact. Take, for example, someone who is earning R20 000 a month, who currently pays around R2 200 in PAYE and gets R17 800 out. If they receive a 5% increase this year, their salary increases to R21 000 a month - but now they pay R2 440 more in tax and get R18 560 out. In effect, they only received a 4.3% increase.
There is also no inflation adjustment to medical tax credits, which will remain at R364 per month for the first two beneficiaries and at R246 per month for the rest.
This blow to households comes even as Treasury admits in the budget documents that South Africa's personal income tax (measured as a contribution to GDP, and the top tax rate) is "far higher" than those of most developing countries.
In the coming year, government expects to earn more than R811 billion in personal income tax - from less than R650 billion two years ago. While they traditionally contributed roughly the same amount to the fiscus, personal income tax collection now far exceeds company income tax, which is expected to be R331 billion in the coming year.
The latest Treasury data shows that the 225 000 people (less than 3% of registered taxpayers) who earn more than R1.5 million will contribute a third of all personal income tax.
Staggered VAT hike
The first 0.5-percentage-point increase in the VAT rate will take effect on 1 May 2025 and the second 0.5-percentage-point increase on 1 April 2026.
To cushion the blow on the poorest households, the list of 21 food items that are VAT-free will be expanded to include:
- edible offal of sheep, poultry, goats, swine, and bovine animals;
- specific cuts such as heads, feet, bones, and tongues;
- dairy liquid blend; and
- tinned or canned vegetables.
Sin taxes
While excise duties on alcohol will be hiked by 6.75%, taxes on cigarettes and vaping products will be increased by a more moderate 4.75%. Treasury says excise tax as a percentage of the retail selling price of the most popular cigarette brands is already at 40%. To make the administration easier, sin tax hikes will from now on always take effect from 1 April - not on budget day as in previous years, Treasury announced.
Transfer duty
There was some good news for prospective home buyers, as the thresholds for transfer duties will be increased by 10% from 1 April.
Fuel
From 2 April, the carbon fuel levy will increase by 3c/litre to 14c/litre for petrol and 17c/litre for diesel. However, the general fuel levy - which has been left unchanged since 2022 - won't be hiked again this year, and neither will the Road Accident Fund levy.
No sugar tax hike
While the so-called sugar tax ("the health promotion levy") was due to be hiked in April, this has been cancelled to assist the sugar companies, which are facing competition from neighbouring countries.
Tax break on cheap phones
Currently, all imported smartphones carry an extra duty of 9%. From the start of April, this is falling away for phones cheaper than R2 500.
Employment tax incentive change
As part of the employment tax incentive, employers will be able to claim a maximum of R1 500 per month for employees earning between R2 500 and R5 500 monthly from April, up from R2 000 and R4 500 previously. The incentive declines as wages increase, tapering to zero at a monthly income of R7 500 (previously R6 500).
Treasury added that the apprenticeship and skills development levy systems will be reviewed. "The goal, in collaboration with the private sector, is to double the number of artisans completing trade tests in the next three years through increased work-based learning opportunities."
Early retirement packages for civil servants
The new budget sets aside R11 billion to incentivise up to 30 000 public servants who are older than 55 years to retire early. This could help save more than R7 billion per year.
"Departments will be allowed to retain their savings from this initiative, and may use them to address existing compensation pressures and support capacity building," Treasury said.
NHI
The NHI is only mentioned in one paragraph in the 273-page budget review document:
"As part of strengthening the health system and preparing for the national health insurance (NHI) policy, the Department of Health will fund the development of a patient information system, a centralised chronic medicine dispensing and distribution system, and a facility medicine stock surveillance system."
Indirect and direct conditional grants for the NHI are allocated at R8.5 billion and R1.4 billion respectively.
SARS gets billions
On top of an allocation of R3.5 billion that was already promised, the SA Revenue Service is now getting an extra R4 billion over the next three years.
Godongwana said this was the result of at least three meetings with SARS boss Edward Kieswetter since the February budget, where proposals from the tax agency about how it could improve tax collection were "interrogated".
