Where Do Your Tax Rands ACTUALLY go?

Where Do Your Tax Rands ACTUALLY go?

After an unprecedented delay in tabling the national budget, Finance Minister Enoch Godongwana eventually announced an expected, but controversial, increase in VAT on March 12.

Instead of an immediate rise of 2%, which was the original plan, the minister has now opted for a more phased-in approach: a 0.5% increase on 1 May this year, followed by another 0.5% increase on 1 April 2026.

The announcement was accompanied by all the usual placatory noises about how this will have a less-detrimental effect on medium-term economic growth and employment than an increase in income or corporate tax. There were also rumblings about above-inflation increases in social grants, and a few additional items added to the list of zero-rated-for-VAT foods.

I for one, however, am not convinced that paying 15.5% less for edible offal and tins of beans and peas is going to soften the overall effect of the VAT increase to any great degree for the majority of South Africans.

Especially when you look at it in the light of this appalling statistic:

In the coming financial year, the South African government will pay R1.1 billion every day to service its debt.

R1.1 billion.

Every. Single. Day.

But wait, there’s more…

This will increase to R1.3 billion a day by the 2027/28 financial year.

 That’s a heck of a lot of offal and beans.

In an attempt to soften this blow, Minister Godongwana was quick to point out that the National Treasury estimates government debt will stabilise (a little) in 2025/26.

“As debt stabilises, a growing primary surplus will enable the government to reduce debt-service costs as a proportion of revenue,” he said. “Some of these savings will be used to build up fiscal buffers that we need as protection against future economic shocks.”

There are two immediate issues here:

1. It will take years before South Africa sees any kind of benefit from a primary budget surplus as small as the Minister and National Treasury are predicting.
2. The fanfare over the increase in social grants is instantly silenced by the realisation that the 22 cents of every tax Rand used to pay the interest on Government debt means we’re spending more on interest payments than on social grants and healthcare.

It’s also more than is expected to be spent on community development, economic development, and even peace and security.

In fact, debt servicing costs remain the fastest-growing expenditure item in the budget.

Numerous economists warn that increasing spending on servicing debt will have dire consequences for our country. It will overshadow desperately needed expenditure on critical sectors such as healthcare, infrastructure and healthcare.

And yet somehow, Minister Godognwana manages to keep a straight face, and clearly fails to appreciate the irony, when he cited “persistent spending pressures in health, education, transport and security” as reasons for the increase in VAT.

If I were to play devil’s advocate for a moment, I would tell you that the government doesn’t have a choice; VAT is the obvious tax to increase because, as respected economist Dawie Roodt says, South Africa is already on the wrong side of the Laffer curve. This makes it difficult for the government to increase income tax.

The Daily Investor explains why in simpler terms than I could hope to:

“The Laffer curve shows the relationship between tax rates and the amount of tax revenue governments collect, and is built on two extremes:

• If the tax rate is 0%, tax revenue would be 0.
• If the tax rate is 100%, no one will work, and the tax revenue would also be 0.

“If the tax rate is incrementally decreased from 100% to 0%, the tax revenue will increase to an optimal point where tax revenue is maximised.

“The government’s goal would be to reach the optimal tax rate to generate the highest tax revenue.

“When the tax rate is raised beyond this point, individuals have greater incentives to do tax planning and arrange their finances in such a way as to pay as little tax as possible.

“As the tax rate continues to increase, productivity would deteriorate as individuals would prefer to stay at lower tax brackets as the reward for hard work would be too low to pursue.”

South Africa also has an ongoing problem with high earners leaving the country when the tax burden becomes too high. This erodes the tax base to almost unsustainable levels.

As it is, we have the startling situation in our country where just 1.5% of the population (a little under one million people) pays 60.9% of all personal income tax, the government’s biggest revenue generator.

Perhaps even more sobering is the realisation that less than 0.5% of our population pays around one third of all personal income tax.

So when you have high earners (and thus high taxpayers) exiting the country in droves, the tax pond in which the government can fish starts to dry up with sickening speed.

The University of Johannesburg estimates that 38,000 taxpayers left the country in 2024 alone, leading to an estimated R3-billion loss in income tax revenue. (That’s not including the other taxes they would have paid, such as VAT on food and luxury items).

Essentially, however, the key issue is not even that we don’t have enough taxpayers, or that our VAT rate is lower than the global average and should be raised anyway.

The reality is this:

• The national debt-to-GDP ratio is 75%, making further borrowing is unsustainable.
• Our tax system depends on a disproportionately small group of high-income earners.
• The number of social grant beneficiaries has risen significantly to more than 28 million over the past 20 years.

As Professor Daniel Meyer, an economic development specialist and policy analyst at the University of Johannesburg, says, “[The Minister’s] plan to raise taxes ignores the real issue: rather than generating more revenue, the focus should be on reducing expenses and ensuring more efficient use of funds.”

This is absolutely the only way we can ever hope to see our tax Rands used for the people’s good, rather than to keep the government’s creditors’ hands off their metaphorical baseball bats.

And yet it’s painfully evident that our government’s spending priorities simply do not sufficiently support investment-led growth.

We may have been spared the 2% VAT increase that was previously on the cards, but it’s merely a case of out of the frying pan and into the fire – instead of VAT, we’re saddled with heavier “stealth taxes,” mainly through income bracket creep.

The bottom line is this:

We don’t need higher taxes at all, in any form. What we do need is reduced expenditure, enhanced efficiencies, a full-scale war on corruption, and minimised waste.

Until then, and as long as the financial burden of unchecked government spending continues to be borne by South African taxpayers, we’re looking at a financial future characterised by dampened consumer demand and sluggish economic growth.

The only positive I can see on this decidedly bleak financial horizon is that South Africa does appear to be on the verge of exiting the Financial Action Task Force (FATF) greylist. We have now met all but two of the 40 technical compliance benchmarks.

Pending a final assessment, we could be off the list as early as October this year. 

Realistically however, putting budgets and greylists aside, the only long-term solution to the sorry state we find ourselves in is to do away with the apparent prevailing attitude of “we will provide less for our citizens while taxing them more,” and introduce solid structural reforms to enhance our fiscal resilience and promote growth.

As the old saying goes, however, “There’s many a slip between cup and lip,” so I remain cautiously optimistic.