Tax hike on the cards for South Africa

South Africa’s 2026 Budget will likely need to include new revenue and expenditure measures to address the shortfall created by 2025’s low economic growth.

This means the two-percentage-point value-added tax (VAT) hike that the National Treasury wanted to implement in the 2025 Budget could still become a reality as the government scrambles for more revenue.

This comes as Finance Minister Enoch Godongwana is set to present South Africa’s Medium-Term Budget Policy Statement (MTBPS), sometimes called the ‘mini-budget’, on 12 November.

This statement is expected to show lower-than-budgeted revenue and signs of fiscal slippage, raising the likelihood of more tax increases set to come.

KPMG lead economist Frank Blackmore said Godongwana’s upcoming ‘mini-budget’ will focus on revising economic growth and inflation forecasts.

At the start of the year, the Treasury expected economic growth of 1.4% for 2025 and 1.7% for 2027, but Blackmore said this will likely need to be downgraded.

He said this means that ratios in terms of GDP will increase considerably over this period. 

“The lack of growth will also mean that your revenue forecasts will not meet expectations in certain areas. Therefore, next year’s budget will need to include plans to address this shortfall,” he said. 

“We may see the introduction of new revenue and expenditure measures, and potential reforms to specific public service programs being announced in the upcoming MTBPS.”

In other words, South Africa’s lower-than-expected economic growth in 2025 means that revenue will likely fall short of expectations as well.

Therefore, the government may need to adjust its expenditure or somehow increase revenue, which usually comes from tax hikes and heightened pressure on SARS to improve collections.

Blackmore noted that the details of the taxes and expenditure programs will not be provided in the MTBPS, but rather in next year’s national budget. 

Instead, the MTBPS will focus on fiscal consolidation and how the budget is progressing, as well as certain progress on infrastructure and jobs.

“I think there are significant changes that are needed in this year’s MTBPS, and those revisions will be provided,” he said. 

“We can also anticipate early insights into next year’s budget regarding both revenue and expenditure measures.”

Plugging the revenue gap

Investec chief economist Annabel Bishop recently pointed out that South Africa is on the way to record a far wider deficit than initially expected, largely due to lower-than-expected revenue.

The Treasury budgeted revenue for the full year at R1.95 trillion. Bishop calculated that this means revenue in the first five months of 2025/26 was expected to generate revenue of around R813 billion. 

However, based on the data available for the first five months of 2025/26, revenue stands at R742 billion. This means that the first five months of revenue are below budget.

While there is still some hope that South Africa will narrow its deficit, with the September data set to be released soon, expenditures will need to fall, and revenue will need to rise substantially.

This is a similar situation to what South Africa faced at the beginning of 2025, when the National Treasury was scrambling to increase revenue to fund the government’s ambitious spending plans.

Its solution, proposed in the February 2025 Budget, was to implement a two percentage point increase in the VAT rate.

However, before Godongwana could present this Budget, members of the Government of National Unity (GNU) said they would not vote to pass it, sending the Treasury back to the drawing board.

A second Budget set to be presented in March was also struck down, with Godongwana only tabling the final 2025 Budget in May.

The Treasury’s compromise was to raise the VAT rate by one percentage point, split over two years.

This decision was later overturned by a court order that suspended the 0.5 percentage point increase that was originally announced to come into effect on 1 May 2025.

The Treasury also relied on other revenue measures, including an inflation-linked increase to the General Fuel Levy and ‘stealth taxes’ like bracket creep, as well as some spending cuts to balance the 2025 budget.

While similar measures could be expected for the 2026 Budget, Old Mutual’s Symmetry chief investment strategist Izak Odendaal previously warned that another VAT hike is not necessarily off the table.

In May 2025, Odendaal said South Africans may face another VAT hike in 2026 if the National Treasury fails to find areas to make government spending more efficient and SARS fails to close the tax gap.