As South Africa braces for the tabled budget this Wednesday, the country's political landscape has again been set alight with speculation.
An initial proposed increase in Value-Added Tax (VAT) by two percentage points has sparked outrage, with many accusing the government of further burdening the poor. However, this narrative is not only misleading but dangerously shortsighted. While VAT will indeed affect the poorest, the underlying issue is far more complex: South Africa's tax base is too small to sustain the current fiscal structure, and the real problem is the lack of economic growth.South Africa's tax system is supported by an alarmingly small group of taxpayers. In the 2023/24 fiscal year, gross tax revenue reached R2.2 trillion, primarily driven by personal income tax (PIT), which remains the backbone of South Africa’s revenue structure.
However, the tax burden falls heavily on a mere 1.6 million individuals, representing just 2.6% of the population, who contribute 76.2% of all personal income tax. Furthermore, the corporate sector mirrors this imbalance, with only 1,051 companies (a fraction of a percent) accounting for 72.3% of corporate income tax. These figures highlight the extent of South Africa’s dependency on a small, increasingly burdened taxpayer base. The situation is compounded by South Africa's sluggish economic growth, which has stagnated under the weight of electricity shortages, policy uncertainty, and widespread corruption. In the fourth quarter of 2024, the GDP grew by a modest 0.6% compared to the previous year, with key sectors like agriculture, mining, and trade dragging on overall performance.
This lack of robust growth is what ultimately hinders the country’s ability to generate the revenue needed to sustain public services. While some may argue that a VAT increase disproportionately impacts the poor, the reality is that South Africa's tax base cannot be expanded in a way that would be sufficient to fund the country’s pressing needs. With nearly 30 million people reliant on social grants, the government finds itself facing a stark dilemma: how do we fund these vital grants without overburdening a tax base that is already under strain? The answer, for now, appears to be VAT, which, although regressive, allows the government to raise revenue while avoiding direct taxation of the few, already heavily taxed individuals. Critics who claim that the government is "anti-poor" for proposing this increase ignore the more profound issue—the government's ability to fund its social grants programme.
The South African Social Security Agency (SASSA) currently disburses billions in grants each year, including the now-permanent R370 Social Relief of Distress (SRD) grant. In the 2024/25 financial year, the Treasury estimates R266.21 billion will be spent on social grants, representing a staggering 3.6% of GDP. The number of grant recipients continues to grow as unemployment and poverty rates rise, with 28.3 million people projected to receive a grant in 2024/25. This means that for every taxpaying citizen, four are reliant on state support.If the government “hated the poor” as some allege, it would have long since reduced or eliminated these grants. Instead, it continues to allocate ever-larger sums to support those who are most vulnerable in society. The fact that the SRD grant has been extended for nearly five years, well beyond its initial Covid-19 emergency relief mandate, is a testament to the government's commitment to providing a social safety net, even in the face of dwindling fiscal resources.
The crux of the issue, however, lies in the failure of economic growth to keep pace with the demands of a growing population in need of social assistance. South Africa’s economy simply is not expanding at a rate that allows for both increased government spending on welfare and the maintenance of a viable tax base. The idea that the government can cut its way to sustainability—by trimming ministerial duties or reducing staff—fails to address the real problem. These cuts might save a few billion rands, but they fall drastically short of the R58 billion required to ensure that the social grant system remains funded in the long term.
The core of the government's predicament lies not in mismanagement or malice but in the grim reality of South Africa’s economic stagnation. We are not facing an issue of misdirected resources or inadequate taxation policy; we are confronting a fundamental lack of growth. A lack of growth exacerbates poverty and inequality, forcing the government to rely on an unsustainable tax structure. The narrative that the proposed increase in VAT is entirely an attack on the poor is reductive and misses the mark entirely.
The real problem is that without a growing economy, the country cannot generate the revenue needed to sustain social grants, public services, or economic stability. South Africa's government does not "hate the poor"; it is grappling with the far more complex issue of how to meet the needs of a growing population in an economy that is simply not growing fast enough. The tax base is far too narrow, and the solutions are not as simple as taxing the rich more or cutting public services. What is required is a concerted effort to stimulate economic growth—through structural reforms, improved infrastructure, job creation, and a focus on expanding the productive capacity of the economy.
While a VAT increase will indeed hurt the poorest in society, this should not be the central focus of our critique. The real issue is the dire need for economic growth, which remains South Africa’s most pressing challenge. To ignore this fact is to perpetuate a harmful narrative that misrepresents the reality facing the government and the nation at large. South Africa’s fiscal crisis is not a result of the government’s disregard for the poor, but rather the result of decades of stagnation, inequality, and policy failures. Only by addressing these structural issues can we hope to build a more equitable and sustainable financial future for all South Africans.
* Roos is a policy writer, researcher, and political analyst.
** Views expressed in this article do not necessarily reflect the views of Independent Newspapers.
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