Government’s NHI and BEE plans in trouble
The withdrawal of a proposed value-added tax (VAT) hike for South Africa could jeopardise the government’s National Health Insurance (NHI) and Broad-Based Black Economic Empowerment (BEE) transformation fund plans.
Aluma Capital’s chief economist, Frederick Mitchell, warned that the government could face significant challenges following this decision.
Mitchell’s comments come after the National Treasury announced that it withdrew the proposal in the 2025 Budget to increase VAT by half a percentage point.
This came in light of mounting political and public pressure and a court case launched by the DA opposing the increase.
The VAT hike was initially proposed as a way for the government to raise additional revenue in light of its struggling fiscus and increasing expenditure needs.
However, many experts and some parties in the GNU raised concerns that the VAT hike would not be enough to offset higher government expenditure and place far too much pressure on struggling South African households.
Therefore, the withdrawal of the VAT hike proposal is welcome, but it leaves South Africa in the dark regarding the country’s fiscal framework for the current financial year.
It also leaves the ANC without a source of funding for its higher expenditure plans in the 2025/26 financial year.
Mitchell pointed to a recent Institute of Race Relations poll, which revealed that the DA is now more popular than the ANC. This shows that the party has lost more than just funding in this Budgetary back-and-forth.
He said that proposed measures, such as the VAT increase and other policy changes, have negatively impacted the public’s perception of the ANC and the Government of National Unity (GNU).
“This situation, combined with lower economic growth forecasts from the IMF, poses significant challenges for government finances and tax collection efforts,” he warned.
“These financial strains could hinder funding for current and proposed projects, such as the NHI and the BEE Transformation Fund.”
In addition, he warned that it raises concerns about South Africa’s ability to manage debt servicing costs and maintain essential service delivery in the medium to long term.
Funding shortfalls

The National Treasury’s announcement of its decision to withdraw the VAT hike proposal lamented the revenue shortfall the government will now experience.
“The decision to forgo the increase follows extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees,” it said.
“By not increasing VAT, estimated revenue will fall short by around R75 billion over the medium term.”
Considering that South Africa has run a budget deficit for nearly two decades and that debt is already at unsustainable levels, this shortfall is one that the government cannot afford.
In addition, the government has introduced several significant and costly plans over the past few years that require additional funding and strong political support within the GNU.
This includes the NHI scheme, which the government estimates will cost an additional R200 billion on top of the current health budget, although private sector estimates place that figure far higher.
The government has also recently unveiled plans to establish a new BEE Transformation Fund, which has been met with severe backlash from both private and public sector players.
Therefore, the ANC now lacks the funding and, possibly, the political pull needed to advance these and other plans.
When announcing the proposed withdrawal of the VAT hike, the National Treasury stated that Finance Minister Enoch Godongwana will propose expenditure adjustments to the National Assembly to cover the resulting revenue shortfall.
“Parliament will be requested to adjust expenditure in a manner that ensures that the loss of revenue does not harm South Africa’s fiscal sustainability,” it said.
“The decision not to increase VAT means that the measures to cushion lower-income households against the potential negative impact of the rate increase now need to be withdrawn and other expenditure decisions revisited.”
The National Treasury explained that any additional revenue collected by SARS may be considered for this purpose going forward to offset the unavoidable expenditure adjustments.
Godongwana is expected to introduce a revised version of the Appropriation Bill and Division of Revenue Bill within the next few weeks.
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