Finance

Tax hike concerns after big election promises

Many experts have warned that tax hikes to fund election promises would be a bad idea, as South Africans are already overburdened, and they would hurt the economy.

These warnings came as the government was under financial pressure to fund its ambitious projects, bail out state-owned enterprises (SOEs), and fulfil its election promises.

The government’s finances have been crippled over the past two decades as it has consistently run substantial budget deficits, racking up a big debt pile used to fund its spending. 

In his budget speech earlier this year, Finance Minister Enoch Godongwana revealed how severely the country’s financial health had declined. 

He said the government would run a R347 billion deficit for the 2023/24 financial year, with more expected in the future. 

When the government runs a deficit, it has to fund it by issuing debt to investors. If deficits continue, the state may end up in a debt spiral, where new debt is issued to cover existing debt. 

The South African government has effectively done this since the 2007/08 financial year, when it last managed to run a budget surplus. 

The country’s financial health rapidly declined after Pravin Gordhan took over as Finance Minister, with government spending spiking and economic growth stagnating. 

This trend has accelerated under President Ramaphosa’s administration despite promising fiscal discipline. 

The government has spent more than it collects for 16 years since 2008, and the problem is only getting worse, with the deficit widening in recent years, as shown in the graphs below.

In the absence of significant economic growth, resulting in greater tax collection, the only ways for the government to pay off this debt would be to raise taxes or significantly devalue the rand. 

Social grants have been a prominent topic in election campaigns since 1994, with parties consistently promising to outdo each other in giving South Africans money. 

With this year’s elections being the most fiercely contested in South Africa’s democratic history, these promises have escalated towards creating a Basic Income Grant (BIG). 

The ANC government has repeatedly extended the Social Relief of Distress (SRD) grant and has stated its plans to use it as a base for a BIG. 

While this may benefit South Africans, it requires a significant sum of money that the government simply does not have. 

This would require the government to cut spending in other areas or hike taxes. Since the first is politically unpopular, the government is likelier to hike taxes to fulfil its promises. 

The SRD grant was allocated R33.6 billion in 2024/25 (with the hike to R370 later adding about R2.2 billion to that), with provisional allocations of R35.2 billion and R36.8 billion for the 2025/26 and 2026/27 financial years.

Besides stating their intention to create a BIG in South Africa, Ramaphosa and the National Treasury have been vague on the details and the financing plan.

The ANC has previously suggested that the grant be funded through a wealth tax, closing tax loopholes, addressing base profit shifting by corporations, and implementing a transactions tax.

Finance Minister Godongwana has even said that he is not ruling out an increase in VAT to fund a BIG.

“It’s too early to make that judgment call because I’ve just tabled the Budget two weeks ago, and I did not increase VAT – but I’m not saying it’s not on the table,” he said.

“Let’s assume, for instance, that the government wants to implement a basic income grant in 2025. That basic income grant must be funded one way or the other,” he explained.

“So, I’m not ruling that out, but it’s not on my radar screen for now.”

Joe Phaahla
Health Minister Joe Phaahla

Another ambitious government project requiring billions in additional taxes is its National Health Insurance (NHI) scheme.

President Cyril Ramaphosa signed the NHI Bill into law on Wednesday, 15 May, which promises to transform healthcare in the country. But, this will come at a severe cost for taxpayers. 

The Department of Health has confirmed that tax increases are on the cards to fund the NHI. However, it has not been clear which taxes will be raised or if a new tax will be introduced. 

Deputy Director General Nicholas Crisp said the only way to move money away from medical aid and into the NHI fund is through taxes.

“Whether that is through VAT or other taxes is a matter for the National Treasury and the Money Bill, which will come later,” he said.

Discovery laid out how much taxes would have to be raised to fund the NHI, which would need around R200 billion a year in additional funding. These increases are listed below –

  • A 31% increase in personal income tax or
  • A 6.5% increase in VAT or
  • A ten times increase in payroll tax

“If you were to do that, I would argue that you would destroy the economy,” Discovery CEO Adrian Gore said.

“It’s not a healthcare issue – it creates a real economic problem. I don’t think people would bear paying 30% more taxes and having 70% less healthcare.”

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